Alpha strategy may move to cash soon
It’s been over nine months since the current XIV buy signal was generated on January 23. Looks like that trade may finally be ending soon as VIX futures remain in a state of weak contango.
This has been a bumper year for the strategy so far with returns over 100% (over 150% at some points recently). My only complaint is having to sit in XIV during the pullback of the second quarter. That was painful, but the pain was quickly forgotten as the strategy made significant new highs.
Of course the real test of a strategy is how it does during the tough times. I’m curious to see how the Alpha strategy behaves during the next bear market in stocks.
Posted on November 5, 2012, in Alpha Strategy. Bookmark the permalink. 11 Comments.
Thanks for the update, Mike.
In your backtests, the Alpha Strategy did very well in 2008, so wouldn’t that lead us to believe that it will behave well in a bear market?
Yeah, the backtest survived 2008 just fine and I do expect it to do well in the future.
Mike,
The main reason for the weak contango is the holiday’s effect.
http://vixandmore.blogspot.co.il/2011/12/december-is-cruelest-monthfor-vix.html
Should your strategy incorporate it?
That is an interesting idea, perhaps incorporating some kind of seasonal adjustment. I’ll have to look into it.
XIV is off to a good start today. What would it take for the Alpha Strategy to avoid going to cash?
Contango needs to strengthen to avoid going to cash. Even if the strategy switches, it could be back into XIV quickly if the market doesn’t fall apart.
Has the model switched to cash already and you are just waiting on a follow-through day for confirmation?
No the model has not switched yet and likely won’t do so today.
Very high chance the switch takes place tomorrow or Friday.
It would be interesting to see with simulated data of XIV (i don’t have them or can’t build but maybe you know someone who can) to see how the strategy performed from 1950 when SPX began. I can’t trade XIV because of taxation problems in ETPs in Europe, I would interested also to see how the trades executed on SPY would have performed. (Maybe then with some leverage application to be like XIV). I use futures.
Anyway simply a work of art!
My blogs:
http://nightlypatterns.wordpress.com/
http://backtestingvix.wordpress.com/
Unfortunately, the vix futures began their existence in 2004. I wouldn’t rely on any simulations before then.