Tactical Volatility Strategy vs SVXY in 2024

VTS Community,

Is SVXY broken this year? 

The SVXY, which is our aggressive position of choice within the Tactical Volatility Strategy whenever Volatility metrics are flashing stable mid to low levels, is really struggling this year.  At the moment of writing this, SVXY is down over -6% for the year.  It was doing decently well until mid July, but since then, nothing but ugliness...

SVXY year to date:

Now in a year where the S&P 500 is doing pretty good, this dramatic underperformance of the Volatility ETP space may be confusing for the "uninitiated."  

Remember, in Batman The Dark Knight Rises, that's what Bane called everyone who didn't train in the league of Shadows, the uninitiated.  I know, not quite as good as the second movie with the Joker, but don't sleep on Batman 3, it was a great movie as well.

The VTS Community are the initiated

We understand that the mess of a VIX futures term structure, and more specifically the consistently flat or negative VX30:VIX roll yield will make it nearly impossible for SVXY to perform well until the curve changes.  That likely won't happen until the US election results are known and accepted, but it is what it is, the SVXY has struggled since July for that reason.

We're tactical investors for a reason 

SVXY hit the high in 2024 on July 12th.  Here's what it looks like if we plot the SVXY since that date against our Tactical Volatility Strategy results.

We were down a bit during that initial slide after July 12th, as it's basically impossible to catch the peak and trough of anything.  In fact, tactical rotation relies on a little bit of weakness to get the signals to move to safety in the first place, so that's not surprising. 

However, we are back above all time highs in the strategy, despite the underlying SVXY being way off its high.

Tactical Volatility Strategy since July 12th:

Return:  0.85%

Max drawdown:  8.70%

SVXY since Jul 12th:

Return:  -23.07%

Max drawdown:  38.48%

The hero we needed, GLD Gold

The bulk of profit within the Tactical Volatility Strategy definitely does come from the times we can catch a longer term trend of market stability and ride the SVXY to large profit.  Overall, the strategy leans Short Volatility the majority of the time. 

However, you wouldn't be paying me if we were just buy & hold investors.  We also have the ability to move to our safety position of GLD Gold when Volatility metrics are elevated.  Those ambiguous periods are just too risky to be holding short Volatility, and we park our capital in Gold.

Gold has CRUSHED short Volatility the last couple months, and we're benefiting nicely from that.  I don't want to jinx it, because gold can be a very frustrating asset class, but so far, thank you GLD!

The election will right the ship, sort of...

We're just a couple weeks out from getting election results, and that will remove all the funky price action in the VIX futures term structure.  Once those results are known, whether good or bad, the VIX futures will begin trading normally again.

Now that doesn't mean they will go down, or that the Short Volatility trade will start to perform well again.  It simply means the election uncertainty will be removed from the term structure, and we'll get an accurate picture of where people's heads are at.

Uncontested:

If there's a clear winner and people are fine with the result, we could see significant Volatility crush and very shortly after the election be right back into the SVXY and looking for a longer term stable trend.

Contested:

If people don't like the results, or even worse, if one of the parties refuses to accept the results and it's contested in ongoing litigation, then of course that could have adverse effect on the market as a whole, and perhaps we will get a chance to use our tail risk VXZ positions.

Trade the signals like a cyborg

Either way, we'll continue to rely on our quantitative signals rather than our gut instinct predictions.  Whatever the Volatility complex tells me to do, I will follow.  Tactical rotation through Volatility targeting, it has worked for me for over 13 years, and no silly election cycle is going to break that!