Sunday, January 13, 2013

VIX-Trading Portfolio Strategy Update for Week Ending 1/11/13

The VIX-Trading Portfolio had a decent performance week, gaining more than 2 percentage points of value or 1.7 points relative to S&P 500's gain of nearly 40 basis points. That said, the portfolio remains in the negative on a year-to-date basis and since inception on both an absolute and relative basis. The reasoning behind this underperformance was the short investment stance running up into the "resolution" of the fiscal cliff talks and the subsequent strong market performance. This performance characteristic is seen in the chart below with the blue line being the portfolio and the green and brown being the S&P 500 and NASDAQ, respectively.


The portfolio remains invested in the 2x S&P 500 Return ETF, as the standardized VIX data points towards a more bullish stance. Now one thing I have to admit is that the VIX-Trading Portfolio is less of a strategy and is more of a real-time experiment using the VIX data to gauge entry and exit points into the market. If and when I get more comfortable with the results using the data, I will begin to migrate the use of the signals into my portfolios and other trading/investing strategies. This is very much a work-in-progress. 

To that end, I wanted to provide an update on the latest models historic performance characteristics, which I show graphically below.


The pink line above represents the performance of the black-box VIX-Trading Strategy. This model goes long the 2x long S&P 500 ETF following periods when the mode gives a buy signal and the 1x short S&P 500 ETF when it flashes a sell signal. The model passively accepts the market's return in all other cases. One word of caution, this model only represents past performance characteristics in the historical context. This is not to suggest that I will use any signal as solely as a black box nor would I suggest anyone do the same. I intend to use the signals in conjunction with other technical and fundamental measures to make trading calls that may or may be biased by the VIX model. If it is one thing I learned over the years is that any working investing model can and will fail at times and just passively accepting any signal from any model can result in significant underperformance.

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