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We moved back into a short volatility trade yesterday  (SVXY)  as the volatility complex is what I would call normal again.  Now whether this is short lived or not is yet to be seen.  It’s certainly possible some new geopolitical events or talk of trade wars resurfaces and spoils the party, but for now everything looks normal so we will go for it.

I definitely consider myself a conservative investor and for good reason.  I’ve live traded through most of the scary moments of the last decade and have seen first hand how quickly things can go off the rails.  Also as I’ve said many times, mathematically losses are always more costly than gains are beneficial.  Remember a gain of 20% and loss of 20% doesn’t mean break even.  That leaves you down money, so it’s always the losses we try to avoid.

However I’m only conservative when I need to be, and when things are normal I go for it.  We hit the trades hard when we get a chance, and we get out when there are signs of weakness.  I believe this is the best way to navigate forward and achieve a great long-term rate of return.  Obviously I’m not a buy and hold investor, that has a tremendously poor track record.  However I’m not a market bear either.  I just trade what’s in front of me, and when it’s time to strike, we strike.

 

So on April 10th my daily blog was called:  Volatility complex still inverted  –  VXST > VIX > M1 > M2.  I had a great question from the community by our friend Nehemia:

“Please explain what you mean by VIX > M1 > M2”

 

Great question and I do apologize.  Sometimes the volatility lingo is unfamiliar to newer members so this is a great reminder for me to always circle back every few months and review.

Here is what the VIX futures term structure looked like on April 10.

 

– M1 is the front month VIX future
– M2 is the 2nd month VIX future
– VIX is the 30 day forward implied volatility index
– VXST is the 9 day forward implied volatility index

 

Here were the numbers for April 10, 2018 when I said it’s inverted:

M1:  20.175
M2:  19.425
VIX:  20.47
VXST:  20.92

As you can see, VXST > VIX > M1 > M2.

This is an inverted volatility complex and a time to be extra cautious with trades.  This is not the default condition for markets so when we see this I always prefer to be in our safety positions.

 

(I’m constantly checking a wide variety of volatility metrics and market indicators, not just these ones so please don’t confuse my explanation today as a comprehensive look at the markets.  It’s no more than a surface look but an important first step to the picture)

 

We avoided all of the ugliness in the last 2 months by paying attention to what the volatility market is telling us.  We exited well before the Feb 5th VIX spike because the markets had already tipped their hand early, and we mostly stayed out since then because this inverted volatility complex persisted for a few months.

 

As I said it may be short lived so we’ll stay ready to exit positions, but we are currently out of the inversion and back into normal conditions.  Here is the VIX term structure today:

 

Right now:  M2 > M1 > VIX.

* this condition has been present 71% of the time since 2004

 

Now it’s not by much and this is because it just flipped yesterday, and also the front month is expiring today and so M3 and M2 are about to become M2 and M1.  If nothing comes along that shakes the market up it will look very normal by tomorrow.  There’s a lot going on in the world that could spoil the party quickly, but for now we trade what the market gives us and contango is back!

 

Current VTS Total Portfolio Solution Allocations

10% VTS Conservative Vol Strategy  –  Optional replacement for lower risk tolerance investors

10% VTS Aggressive Vol Strategy  –  Optional replacement for higher risk tolerance investors

50% VTS Tactical Balanced Strategy

20% VTS Iron Condor Strategy

10% VTS Discretionary Strategy

Temporarily paused:  VTS Tactical Volatility Strategy

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