On January 30th, 2019 VXZ will be discontinued. It is being replaced by VXZB. In addition to VXZ being delisted, VXX will also be delisted and replaced by VXXB. So, any of you using VXZ (like I am) will want to replace the position with VXZB before the end of next month. You can read more about it at Six Figure Investing.
FYI, today near the close I rebalanced the volatility hedged portfolio. VXZ was up 14% and my longs were down about 9%. I sold some VXZ and bought some long positions with the profit. The portfolio is now back to 50% long and 50% VXZ.
My Market Risk Indicator is signalling today. That means I add a mid term volatility hedge to the Volatility Hedged portfolio and the Long / Short hedged portfolio. The Long / Cash portfolio goes 100% to cash. The portfolio allocations are as follows: Long / Cash portfolio: 100% cash Long / Short hedged portfolio: 50% long high beta stocks and 50% long mid term volatility (or an ETF like VXZ or VIXM) Volatility Hedged portfolio: 50% long and 50% long mid term volatility (or an ETF like VXZ or VIXM) As always, use your own judgement and personal risk preferences to allocate your own portfolios. And, of course, never trade a financial instrument that you don’t understand.
My market risk indicator is warning again this week. That means a mid term volatility hedge on all the portfolios or going to cash. Below are the current portfolio allocations. Long / Cash portfolio: 100% cash Long / Short Hedged portfolio: 50% long and 50% hedged with mid term volatility (an ETF/ETN like VXZ) Volatility Hedged portfolio: 50% long and 50% hedged with mid term volatility. My core market risk indicators are also dropping fairly quickly.
2015 was a year of intermediate term whipsaws. 2016 saw longer term indicators whipsawing. The longest term indicator I follow is Dow Theory. It looks for trends that last from one to three years (or longer). As a result, Dow Theory gives a lot of leeway to counter trend moves. It’s common to have a 10% or 15% correction during a long term bull market that doesn’t change Dow Theory’s long term trend. You can see some examples during the long term uptrend from mid 2009 to early 2016 in the chart below. Zooming in to the last few years, you can see what appeared to be a long term trend change according to Dow Theory. In August of 2015, both the industrials (DJIA) and the transports (DJTA) had large enough corrections to mark Dow Theory secondary lows. In December of that year, DJTA broke below its secondary low point and created a bearish non-confirmation in the indexes. In February 2016, DJTA broke its secondary low point. This created a
My market risk indicator cleared its warning this week. As a result, the volatility hedge will go 100% long. In addition, the core portfolios will remove their aggressive hedge and replace it with a short of the S&P 500 Index (SPX). My core market health indicators all improved with the exception of market quality. My measures of the economy improved enough to go positive which will change the core portfolio allocations a follows. Long / Cash portfolio: 20% long and 80% cash Long / Short portfolio: 60% long high beta stocks and 40% short the S&P 500 Index (or use the ETF SH) Volatility Hedged portfolio: 100% long Below is a chart of recent market risk indicator signals. As I noted in January, the market risk indicator signals near inflection points where the market either turns back up quickly or accelerates to the downside. This signal has the same appearance as the 2012 and 2015 signals, where the market traded slightly lower after the signal, but the warning didn’t clear
Wow. What a week. Like the market all of my core health indicators got hammered. They are now all deep in negative territory. I’ll let the chart speak for itself. One thing of note is that my market risk indicator is now signalling. This changes the volatility hedged portfolio to 50% long and 50% hedged with mid term volatility (an ETF/ETN like VXZ) or dynamic volatility (XVZ). For official tracking purposes I use XVZ, but the instrument is thinly traded so it introduces problems in actual portfolio management. First is that thin trading means it is difficult to fill large trades at a good “market” price. Second is that in a swiftly declining market the bid may as much as 20% below the market so you’ll have difficulty getting out of the position (or rebalancing) when pure panic has set in. As a result, I personally use mid term volatility like VXZ instead of dynamic volatility. But, since the back test has been done with XVZ I’ll continue to use
2015 was a year of whipsaws for the core portfolios. Take a look at the chart below and you’ll see the allocation changes throughout the year. Green lines represent adding exposure, yellow reducing exposure (or adding a hedge), and red represents a market risk warning. The core portfolios added exposure early in the year only to reduce it just before the August drop. It was nice to sleep at night during the turbulence, but it didn’t help the portfolios much because we then added exposure just before the market started to dip again. If you were holding small caps the changes were more painful than if your portfolio was closer to Nasdaq or the S&P 500 Index (SPX). Overall, the portfolios did as expected in a flat year for the market. Without a direction, whipsaws are expected. The important thing to notice on the chart is that the core portfolios were 100% in cash or 50% long and 50% short just before the decline in August. In contrast, my market
With the sell off this morning I’m taking the opportunity provided by a spike in volatility to take some profit from the hedge and soften it in the Long / Short Hedged portfolio. I’m taking all profit from the hedge and buying new long positions with it. In addition, I’m selling 1/3 of the aggressive hedge (mid term put options, VXZ, or XVZ) and buying a short of the S&P 500 Index (or using SH). Usually, the longs in the portfolio have dropped enough that the new allocations are fairly close to a 50% long and 50% hedged position after a rebalance. But due to the large increase in volatility without much price damage in the market since 8/21/15 (when my market risk indicator signaled) the new allocations have a slightly smaller hedge than is normal after a rebalance. The new allocations for the Long / Short portfolio are as follows. 53% Long stocks that I believe will outperform in an uptrend (high beta stocks) 15% Short the S&P 500
Many people have the mistaken idea that high volatility (VIX) means falling markets. They’ve been trained by financial news outlets to associate volatility with fear. This notion is only half right. Volatility is also connected to greed. In reality, volatility is a reflection of the size of a price movement regardless of the direction. Take a look at the chart below and you’ll see that during the late 1990s price was rising, but in wide daily ranges. This caused VIX to rise substantially while the market was going up. VIX went up from about 10 to 27 (170%) while the S&P 500 index (SPX) almost doubled from late 1995 to just before the Russian financial crisis of 1998. So without much “fear” in the market VIX nearly tripled. After the Russian financial crisis VIX stayed elevated in a range between roughly 19 and 30 as SPX climbed 38%. Large range days while the market was rising created an elevated VIX. SIDE NOTE: I’m using VIX to show the price move
Market Risk Warning
Volatility Hedged Portfolio
Long / Cash Portfolio