Tactical Investing through Volatility Targeting

Video Transcript:

(0:00 - 2:50)
So after a pretty long period of stability, the stock market has finally started to show some weakness. Last Friday, August 2nd, 2024, the S&P 500 crashed a couple percent and the long volatility product called VXX spiked up 24% in a single day. That was the fifth largest spike in the last 20 years since the VIX futures launched in 2004.

Now at VTS, we are not buy and hold investors. Our system involves using volatility metrics to tell us when to move into safety before the market crashes. And after such a terrible week, today is the perfect day to demonstrate exactly how that works.

I can show you how much money we actually saved by moving to safety positions. So smash that like button for me, subscribe to the channel if you haven't already, and let me show you exactly what volatility targeting is. So like I said, we're not buy and hold investors.

Our portfolio is currently five strategies, but two of those are option trading, so we can talk about them in another video. But these three strategies are all what I call tactical rotation through volatility targeting. I can explain what that means in about 30 seconds using our tactical volatility strategy.

We use volatility metrics to divide the market up into three ranges. When volatility metrics are mid to low, representing stable markets, we'll be profiting from short volatility with the ETF called SVXY. When volatility is elevated and market risk is rising, at this point it's too dangerous to short volatility and we'll be in our safety position of GLD gold.

And then during the most extreme market crashes, we'll move into the long volatility and be profiting from the market crashing. This system is what I call volatility targeting. Now we got our trade signal on July 24th to move into that safety position of gold.

That was nine days before last Friday's fifth ever largest VXX spike. That didn't affect our portfolio at all. In fact, we made money last week.

The black line there is showing SVXY, which is the short volatility ETF that we use in our strategy. You can see its performance in the last 10 days. It's fallen off a cliff.

But we got our signal to move to gold on July 24th, so that green line is our strategy's performance because we've been in safety this whole time. The difference between the two is almost 15%. Now obviously we're pretty happy that we completely avoided all the trouble and we actually made money this week.

But that's not the lesson today because remember, short volatility ETFs can crash a whole lot more than they did last week. The S&P 500 is only down about 5% from its all-time highs. Now maybe it recovers next week.

Who knows? I suspect it probably will. But there's been many market crashes far worse than last week. What if this 5% crash is just the start of something heading towards 15 or 20% or maybe 56% down like in the financial crisis? When the bottom finally falls out in this manipulated bubble market, it's really gonna go.

(2:50 - 4:58)
And even though it's awesome that we had a 15% differential in the strategy, we're up and short volatility was devastated, the reason we moved to safety is because occasionally we're going to be able to save ourselves maybe 50% or more in a true crisis. That's why we have discipline to cycle to those safety positions. Now remember, we have three volatility targeting strategies.

Our defensive rotation uses the 2x NASDAQ index QLD as our aggressive position, and then either XLU Utilities for safety or full-on cash for a crisis. Here's what the QLD did the last 10 days. Not quite as bad as short volatility, but very ugly nonetheless.

Again though, we got the signal to move to XLU Utilities way ahead of time. That orange line is our performance because we've been sitting in safety this whole time. Again, a profitable week for us with a differential of 11%.

There's very little stress when you're already in safety and you're just watching it all from the sidelines. Our third one, strategic tail risk. This uses S&P 500 for stable markets, IYR real estate as a safety position, and then again, long volatility for that tail risk protection in an extended recession.

There's no leverage involved here, but the S&P 500 itself, like I showed, was down quite a bit. Our performance though in red, again, profitable week because we cycled into IYR real estate way before the trouble. All three of our strategies are up money in the last 10 days, but again, I want to stress, the reason we do this is not to save ourselves an extra 10% in a bad week.

It's because we all know what's eventually going to happen to this market. If traders don't know how or when to cycle out into safety, they could very well give back a large chunk of all the gains this bull market has given them. Unfortunately, that tends to be the pattern for most investors out there.

Two steps forward because everybody's a genius in a bull market, and then one giant step back because of course the house of cards eventually will fall down. This video here shows proof of one of my favorite volatility metrics working its magic and cycling in and out of short volatility positions. And this one is a breakdown of my entire portfolio and all five of those strategies.

So if you're ready to start crushing the market, you need to check that one out next. See you next time.