Allocation change
Got out of VXX today at $28.03 for an 11.86% loss. Ouch.
The activity in the VIX over the past two days is rare. VIX declined more than 17% two days in a row. This hasn’t happened before. It’s only the third time registering a greater than 30% drop over 2 days.
If we look at VXO (the old methodology VIX), we see it declining more than 19% two days in a row. That has also never happened before. It’s decline of 42% these past two days was only topped once in October, 1987 (shortly after black monday).
Here’s hoping the next trade doesn’t turn out quite so bad.
Posted on January 2, 2013, in Alpha Strategy, Transactions. Bookmark the permalink. 9 Comments.
The ‘cliff’ part of ‘fiscal cliff’ was a good clue that the VIX could ‘cliff.’
Seems to me that any strategy that works well in normal times will be risky with a fiscal deadline looming and uncertainty about the outcome. I’d chuck out any technical strategy and stick to a fundamental strategy during those times.
Plus, holding XIV as I did during the last month, I had lost steadily as the VIX rose. No problem since I expected to get that back as the VIX dropped back. But by switching to VXX I would have risked not getting that back and doing even worse. The only thing that will get me into VXX is a sustained crisis that keeps the VIX futures in backwardation. A crisis with a deadline doesn’t count as sustained.
Hi Nick, I agree that fundamentals have their use too and congratulate you on being on the right side of the trade.
My issue is there will always be an endless cycle of things to worry about. I try to ignore these by sticking to mechanical strategies. Sometimes, like today, this will hurt me but I believe it will work out best for me in the long run. Others may be able to trade primarily on fundamentals and do great. I don’t think I have that skill.
Take care.
I agree with Mike, at least as far as my own trading is concerned. The problem with fundamentals is that they can’t be tested, nor can results be verified. One can hit a home run on a day like today and then, on a similar day, the fundamentals don’t seem to work. The result is a more subjective kind of trading.
Now, I also agree with Mike that some people can do this consistently, but I’d wager that that number is small. I strongly suspect that most people who trade based on fundamentals end up losing money. I much prefer using strategies that can be backtested and, once that phase is over, tested in real time. For me, at least, a real time equity curve is worth a lot of fundamental hits and misses.
‘The activity in the VIX over the past two days is rare.’ True. But a gain or loss of over 10% in a day for VXX / XIV isn’t rare. So in the long run your single 11.86% loss means nothing. It’s just part of the normal ups and downs of any strategy – fundamental or technical. So no congratulations or commiserations are deserved.
Agree that one bad/good trade means nothing in the grand scheme of things.
Seems to me that fundamentals drives technicals and one should not attempt to separate the two. For instance, it’s obvious that the negative fundamentals surrounding the fiscal cliff pushed the technical parameters of the model in VXX last Friday. So Now the question becomes do you override the model and get back in XIV now that the fiscal cliff issue is partially resolved which essentially improve the fundamentals or is it better to wait on the sideline until the model catches up with the “improve fundamental”.
Mike,
When you have the time, could you give us a sense of how often, on average, Alpha 2 trades?
32 roundtrip trades in 2012 with holding periods ranging from one to 14 days. Trades in earlier years are similar.
The brinkmanship that killed the XIV returns over the last month will be repeated in two months time when the debt ceiling will need to be raised. Uncertainty in the outcome will cause the VIX to rise (it’s not just a ‘fear’ gauge, it’s an uncertainty gauge).
This is fundamental information, not technical. Late February will not be a good time to hold XIV.
Brinkmanship == poor XIV returns