Monday, December 31, 2012

VIX-Trading Portfolio Update for Week Ended 12/28 adn Year-End

For the week ended 12/28, the VIX-trading portfolio turned slightly positive against the S&P 500. The portfolio finished the week up 1.8% versus a 1.9% loss on the market. The portfolio finished the week 30 basis points (BPS) ahead the market.

graph of fund vs. market indexes

The gain on the week was reversed in today's trading following a break-through of sorts on the fiscal cliff impasse. For the year-end, the portfolio finished down 2% versus a 1.4% gain on the S&P 500 over the same period.

The weighted-average standardized VIX continues to rise even with today's 20% decline in the risk gauge. I calculate the standardized VIX at a level of 0.11, which is between the definitive buy and sell thresholds of -1.5 and +1, respectively. As such, the model reverts to the alternative measure using the daily standardized VIX. The daily standardized VIX is presently 0.98, and suggests poor future performance. In fact, historical periods when the weighted average standardized VIX is in the grey zone and daily standardized VIX is above 0.9 is typically followed by very poor market performance. The following tables shows the average the 6-month average and median performance of market on any day since 2000 as compared to future performance after the VIX criteria described above is seen.

BnH VIX Crit
Average  0.83% -8.38%
Median 2.58% -9.11%

Of course, past performance is no indication of future results. However, combine this with today's price/volume action (noting the volume was not strong enough in my opinion to mark a reversal, note to follow), and I think you can start to build a case for building downside risks.

Short Trading Portfolio Update for Week Ending 12/28 and Year-End.

In the most recent ended week, the Short-trading portfolio far outperformed the market, gaining 1.7% versus a 1.9% loss on the S&P 500. The better performance on the latest week was a result of steep declines in the mortgage REIT sector Express Scripts (which is a play on my expectation for declining payroll numbers come 2013) and a lower price in the NASDAQ 100. These results were only partially offset by better prices in the commodity shorts.

graph of fund vs. market indexes

As for the year-end,the portfolio has gained only 3.2%. This is still better than the market's return over the same period and the portfolio was ahead of the market by 4.3 percentage points.

Long-Trading Portfolio Update for Week Ended 12/28 and Year-End

For week ended 12/28, which included the Christmas holiday, the Long-trading portfolio dropped by 80 basis points (bps) versus a 194 basis point loss on the S&P 500. The loss experienced was largely due to a decline in the price of coal stocks partially offset by a short position on the market.

graph of fund vs. market indexes
As for the year-end,the portfolio has gained more than 13 percentage points since inception, besting the performance of the S&P 500 by 1400 bps over the similar time period.

Long- Term Value Portfolio for Week Ending 12/28 and Year-End

At the end of the Christmas week, the Long-term value portfolio lost 80 basis point (bps) in value. However, the S&P 500 lost 190 bps over the same time and the portfolio gained ground against the market. Since inception, the portfolio has gained 4.9% or 1.9% better than the market. Including dividends on the S&P 500, the Long-term value portfolio is ahead of the market by about 20 bps.

graph of fund vs. market indexes
For the year-end,the Long-term value portfolio gained 7% versus a 4.9% increase on the S&P 500 over the same time-period. Including dividends, the portfolio put in 40 bps better performance than the market.

Risk of Recession Remains Unchnaged Despite Fiscal Cliff Deal

No matter what the talking heads on cable say, the odds of recession and fiscal cliff do not appear correlated. In fact, now that a deal semi-averting the fiscal cliff looks done the risk of recession (according to intrade traders) is up slightly on the news.

As stated in a previous post, the odds of recession of the outcome of the fiscal cliff talks seemed largely independent.

All that Glitters- Just Waiting for the Opportunity to Buy Gold Stocks

I see two scenarios playing out in the near-term. The first, is that the price of gold declines to my expected targeted range around $1,590 per ounce. The second, is that money supply growth accelerates. Both these scenarios, in of themselves, would likely result in a more attractive outlook for gold and precious metal stocks. My guess is that we will see both scenarios play out. That said, I believe that the ramp up in money supply is already expected by the market, and will not help the price of gold or god stocks to any great degree. That is unless money supply sustains significant weekly increases, say (and this is not a scientific statement what so ever) consistent 1% increases. More so, gold looks to be under distribution and the price/volume setup suggests to me that gold will test the consolidation range of early 2012

In any event, the latest weekly model results are presented below. There was no significant change from the previous week's results.

3-month model

1- year model

6- month model