5 February 2018: Reality check

For almost as long as These Dutch Guys are reporting on the comings and goings of the stock market, the word fear has been virtually absent in the vocabulary of investors. No terrorism, hurricanes, Russian meddling, theatrical threats of all out nuclear war, ever-expanding controversies surrounding the White House, or any other form of bad news seemed to upset the unshakable optimistic mindset of investors. What happened last week in the stock market, reminds us of that one other direction stock prices can go, which is: down.
A temporary hiccup, or the start of a more serious shift? Are investors frightened this time by the ongoing sell-off in bonds? Who knows. Friday’s decline was at least a reality check for those who had come to believe that there is no limit to the rise in price of securities. According to some, we should prepare for (much, much) worse to come. Others say that the bulls are ready to buy the dips as they have done so many times before during the recent years, and that this nine year stock rally still has ‘years left’. Right. We’ll see.

white-chapel-logo-smallA sharp sell-off in the stock markets last Friday, despite some mainly positive economic news from the Bureau of Labor Statistics (200,000 jobs added to the US economy in January, and the unemployment rate remained unchanged at 4.1%). But rate-hike fears spooked investors and sent the indices running for cover, ending the worst week in two years. The Dow plunged by 666 points on Friday (-2.5% for the day, -4.1% for the week), the S&P 500 dropped 60 points (-2.1% for the day, -3.9% for the week) and the NASDAQ was down 145 points (-2% for the day, -3.5% for the week). Volatility rose during the start of the week, but eased from Wednesday up until midday trading Thursday. From then on, the VIX catapulted from 12.50 to 17.31 at Friday’s close, a rise of 38.5% in just 1.5 trading days. UVXY ETFs closed 27.2% higher on Friday. XIV ETNs lost almost 11%.
All our models were fully taken by surprise, as they were all in possession of XIV ETNs. To put things into perspective: our model Danny Daredevil, over the course of 23 years and one month (the backtesting plus the live trading period up until now), has seen 139 trading days at which he held XIV ETNs in portfolio that declined in value by 11% or more. This averages out to be about 6 occurrences each calendar year. Last year 2017 this happened twice: on 10 and 17 August. In 2016 it happened once, on 24 June (Brexit). In 2015, three times: 25 August, 1 and 18 September (Chinese stock market turbulence). In 2014 one occurrence on 23 October. Four times in 2013: on 25 February, 15 and 17 April, and 20 June. Once in 2012: on 21 June. 2011 takes the cake with no less than seven such occurrences: on 22 February, 4, 8, 10 and 18 August, and 1 and 9 November. With the exception of 2017, all these years closed with a positive AAR — the highest of them all being… 2011 with an AAR of 1266%.
Danny Daredevil´s RSS dropped by more than 12 percentage points to below 4%. Adventurous Anny´s RSS fell by 13 percentage points, to above 10%. Solid Suzy and Lazy Larry ended the week with an RSS of 73%, 21 percentage points lower than the day before.
None of our models gave a trading signal at the end of Friday’s session.

Model Holds Start date

RSS

YTD

QTD

AAR

Danny Daredevil XIV 1 January 2016

3.56%

1.54%

1.54%

2%

Adventurous Anny XIV 6 March 2017

10.51%

-10.08%

-10.08%

12%

Solid Suzy XIV 6 March 2017

73.29%

-14.05%

-14.05%

82%

Lazy Larry
XIV 6 March 2017

73.29%

-14.05%

-14.05%

82%

RSS = Return Since Start | YTD = Year-To-Date | QTD = Quarter-To-Date | AAR = Average Annual Return

 

The Chapel Family – Episode 18

Danny, Anny, Suzy and Larry are driving along a congested expressway. Danny is behind the wheel of their beaten-up Jeep Grand Wagoneer. The only sound is coming from the radio.

Get down deeper and down
Down down deeper and down
Down down deeper and down
Get down deeper and down

Danny starts a monologue about eliminating traffic jams by designing more efficient systems from scratch. No one seems to listen.

Again again again again again again again
Deeper and down
Down down deeper and down

As the traffic comes to a halt, the four sit mired in frustration. Anny, who is sitting in the passenger seat, opens up a bottle of mineral water and takes a sip. Danny’s monologue now sinks in an unintelligible murmur. Anny looks at him with a vacant stare, upon which Danny’s voice sinks into silence.

I have all the ways you see
To keep you guessing
Stop your messing with me
You’ll be back to find your way

Suzy, from the back seat: “Hey! Can someone please stop that music?”

 

Red check image by §hepTalk (Derived from Yes check.svg:) [Public domain], via Wikimedia Commons