1 January 2018: Review of Q4 and 2017

The fourth quarter of 2017 saw an (intensified) extension of the so-called Trump rally that started almost a year earlier. Companies reported solid earnings and the passage of a tax-reform (a lowered corporate tax rate to 21% from 35%) gave an additional tailwind to equities. Geopolitical issues, which had surfaced a number of times during the first part of 2017, took a break during the last months of the year. Volatility remained at (extremely) low levels for most of Q4. Major US stock indices added between 6.1 and 10.3 percent during the fourth quarter of 2017. Gains were recorded across many sectors of the economy, with telecommunications and energy being the only exceptions.
Danny Daredevil was not able to recover from the big loss he suffered during Q3, due to the lack of volatility during Q4. To the quarterly loss of 68% during the third quarter another loss of 27% was added during the fourth quarter of 2017. Below is the graph of Danny´s performance in Q4 of 2017.


Adventurous Anny was idle for most of the trading days of Q4. She held XIV ETNs for only nine days during this quarter. She was able to record a gain of 13% during this small number of days. Below is the graph of Adventurous Anny´s performance in Q4 of 2017.


For Solid Suzy and Lazy Larry, the only way was up. To three quarters of 2017 which were already successful, these models added a quarter which was even more lucrative. The quarterly result of Suzy and Larry during Q4 was no less than 38%. This very strong quarter elevated their RSS to above 100%. Below is the graph of Solid Suzy´s and Lazy Larry´s performance in Q4 of 2017.

 

“Last year was characterized by surprises and uncertainty.” Those were the words we used to summarize 2016. For 2017 we could change this to: “Last year was characterized by a lack of surprises and uncertainty.” For the year, the S&P 500 gained 19.4% and the NASDAQ rose 28.2%. The Dow added 25.1%, having hit 71 closing records over the year, itself a record. All three posted their best year since 2013, and the NASDAQ rose for its sixth straight year, the longest such streak since one that lasted from 1975 to 1980.
As a result, 2017 turned out to be a year that was especially negative for our models that profit most from high levels of volatility.
Especially Danny Daredevil suffered a lot from the lack of events that cause a stir and/or a negative sentiment among investors. Until the beginning of April, Danny even managed to record a solid gain. But after that, his RSS went downhill (except for a short-lived upturn at the end of May). For the remainder of the year, stock prices appeared to know only one direction: up. And volatility was characterized by just one level: (extremely) low. Danny Daredevil saw his RSS drop quickly to the level at which he started at the beginning of 2016. He closed the year with a measly AAR of one percent.
Adventurous Anny was not hurt by the state of complacency in the markets, but was also not able to make a big profit. In contrast to Danny, she did not suffer huge losses in the second part of last year, because she was holding cash most of the time. Her result for 2017 limited itself to ‘just’ 23%.
The exceptional state of the US stock markets in (the second part) of 2017 is demonstrated by the fact that Solid Suzy did not record a single trade in 2017 (except for the initial purchase of XIV ETNs at the induction of this model). In an average year, more than five trades would be normal. Suzy did not complain, however, as she was able to profit fully from the fact that XIV ETNs rose more than 100 percent since the beginning of March.
To Lazy Larry, rising stock prices are a blessing. He too profited maximally from the strong increase of the value of XIV ETNs.
The graphs below show the strong contrast between Danny on the one hand and Solid Suzy and Lazy Larry on the other hand. Anny remained neutral (a.k.a. held cash) for most trading days of 2017.