After a record setting long period of calm in the markets we’ve finally had some fireworks and the streak of no 3% pullbacks for the S&P 500 was finally broken at 311 trading days. The previous record was from the mid 1990’s at only 241 trading days so this current streak ends way beyond anything we’ve ever seen in the markets. The record streak with no 5% pullbacks is still alive through so we’ll see if the sell off continues and breaks that too.
With the crash last Friday the VIX index touched levels we’ve not seen since the US election in November of 2016.
Because it’s been so long since we’ve seen anything like this I thought I would give a general breakdown of what to expect from each of the VTS strategies going forward.
VTS Aggressive Vol Strategy: Currently in cash
The reason I mention this one first is because it’s the most likely to move into a position soon. It uses no leverage and only trades the 1x products so it’s not really that “aggressive” but the name is because it will move into SVXY or VIXY positions faster than the other two volatility strategies I have. If stocks continue to sell off it’s likely to move into long volatility VIXY quite soon, and if we see a recovery this is the strategy that will move into short volatility the soonest as well. It’s the highest absolute performer because it catches more of the trends both up and down, but it’s more active which also means larger drawdowns when markets are switching directions a lot.
VTS Conservative Vol Strategy: Currently in cash
Although it’s the most conservative strategy, it will actually move into a long volatility VXZ position relatively fast as well. That would require the S&P 500 to continue to drop, but we’re not far off those signals moving to full on red and buying vol. We haven’t done that in a long time so a part of me hopes we see that. If stocks recover though which they certainly could very quickly, the strategy will wait a little longer to get back into shorting volatility than the Aggressive Vol will.
VTS Tactical Volatility Strategy: Currently in cash
This is the main volatility strategy and the one that’s planted right in the middle of the risk spectrum. No leverage is used of course, I don’t use leverage in ANY of my trading and it also only trades the 1x products. But with a target of being in cash over 50% of the time, it does wait a little longer for more solid confirmation of trends before acting. Which ever way these markets resolve, whether they crash further or there is a recovery, the VTS Tactical Volatility Strategy could be getting into a few trades soon.
VTS Tactical Balanced Strategy: Currently long GLD Gold
This strategy is designed to be in the stock market during calm periods, but as soon as there is any sign of trouble it moves into either bonds or gold. In a blog post last week I talked about why we moved out of stocks and into safe positions and it turned out to be very well timed. Right now we’re in gold. One question I received in a few variations over the weekend was, why did gold go down on Friday as well?
Investing is never an exact science, it’s a game of probabilities. Nobody can predict the markets with any accuracy so the very best we can do is put statistics and the law of large numbers on our side and then just let the passage of time be our ally.
Historically speaking when stocks are going down gold has been a good asset class to be invested in. That certainly doesn’t mean it’s an exact 1 to 1 inverse relationship. There’s plenty of times that gold goes down right with stocks and vice versa. But in the long-run I feel very comfortable being in gold when stocks are performing badly. It may or may not work this week, but over multiple years it’s definitely a winning strategy.
VTS Iron Condor Strategy: Currently in cash
As I’ve talked about a lot with this strategy, selling volatility during low volatility environments like we’ve seen since the US election in late 2016 is dangerous. The premiums are low which puts the strike wings quite narrow. Any minor moves after that can have amplified negative results so we’ve had to navigate our entry points very carefully. Results for the past year have predictably been quite flat, but with volatility returning to the market we may be able to start getting more active again.
One thing I will tease a little bit today is I’m planning on making a few changes to the strategy. I will get into a full video and some blog articles explaining all the changes so don’t worry, but just as a teaser:
1) I will be splitting up the allocations into 2 pieces. In the past we’ve put 100% of capital into each trade but going forward I would like to trade half size allocations and more often.
2) I’d like to add in the long volatility Calendar spreads as well. In the past it’s only been Iron Condors which are great for higher volatility environments but very dangerous during low volatility. Calendar spreads have very similar characteristics to Iron Condors but are a better low volatility trade.
So strap in folks, this is what it’s all about! It’s been impressive to watch the markets be completely flatline boring for so long and see the VIX index scrape the bottom of it’s range longer than any time in history, but that is not normal. That’s an outlier. I suspect we are about to see markets get a whole lot more interesting in 2018. Fun times ahead.
Current VTS Total Portfolio Solution Allocations
VTS Aggressive Vol Strategy – Optional replacement for higher risk tolerance investors
VTS Conservative Vol Strategy – Optional replacement for lower risk tolerance investors
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