Fidelity Lifts Restrictions On SVXY

After prohibiting SVXY as part of fallout from the XIV blow up last year, Fidelity is now allowing people to purchase inverse volatility funds provided they complete a one-time Investment Disclosure.

After attempting to place the order, you will need to read their disclosure and check a box to indicate that you agree. 

After that you can trade SVXY there as before in either retirement or cash accounts.

Other brokers have lifted restrictions as well so it may be worth checking yours as well if you previously faced issues with inverse volatility ETNs.



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Barclays To Replace VXX With VXXB

As planned in the original VXX prospectus from its launch in 2009, VXX will be delisted as a security next week on Jan 30, 2019. Barclays has issued the replacement, VXXB, which is currently trading and is essentially identical to VXX.

To help with the transition, Barclays has published a VXX/VXXB comparison sheet as well as guidance around the transition process.

We have been keeping an eye on the outstanding number of ETNs for both VXX and VXXB over the past month. Very little progress has been made in the transition and VXX continues to hold about 3x the assets of VXXB, with VXX holding $921M as of yesterday.

If VXX's market cap does not come down substantially by Jan 28 there exists a potential for a temporary volatility crash on Jan 29 through Jan 30 as Barclays will need to pay cash out to holders on VXX on Jan 30.

However, as outlined in the guidance document, there exists an option for larger investors to take no action and simultaneously sell positions in VXX and buying equivalents in VXXB and may happen in the last days of VXX trading. This would be the smoothest transition route but it is not clear the percentage of holders will be utilizing this option.



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Market Trends Point To Another Year of Volatility in 2019

Navigating the stock market in 2017 was easy. Shorting volatility was easy money. Picking individual stocks was easy and everyone was a brilliant strategist.

Then came 2018. The graph below highlights the fact that while less than 2% of assets were negative in 2017, 90% of assets are negative YTD in 2018 -- they highest percentage since... ever.


In another stark contrast to 2017, the short volatility ETPs have lost over 90% of their value in 2018 thanks to February's historic volatility spike. Last year's buy-and-hold everything strategy has been a bust across the board in 2018.

One of the few assets that lost in 2017 was volatility. Unsurprisingly, volatility has been one of the few bright spots in 2018 with the VIX index gaining +74% YTD and VXX +32% YTD.

What sort of market trends appear to be happening now and on tap for 2019?
 - decelerating corporate earnings [now]
 - late stages of the corporate debt cycle [now]
 - decline of demand for U.S. Treasuries [now]
 - quantitative tightening [now]
 - slowing global growth [now]
 - trend of de-dollarization [now]
 - eventual reverse to more quantitative easing [late 2019]

That's a recipe for another difficult year for a range of assets with a strong possibility of wide movements within the equity markets as the year progresses. As we stated three years ago, traders need data-driven, reliable, observable, and easy-to-follow trading rules in order to set themselves up for consistent success. One of the reasons that 90% of people fail to make money at trading is they fail to have a process-oriented trading plan. As the saying goes, "Plan the trade. Trade the plan."

We think that volatility will again be a major factor within the markets in 2019. Our playbook to make money on short-term investing opportunities is to maintain a quantitative-driven investment process for volatility ETPs that has made us successful for the past 7+ years. Specifically, our VXX Bias and VRP indicators.

Why? Because they perform exceedingly well over the long term by trading both long volatility using VXX (soon to be replaced by VXXB) and short volatility using SVXY (previously using XIV).



We've previously noted that 2018 has given us trouble and that hasn't changed much since July. Our automated trading performance as tracked by a third party now stands at -22% for VRP+VXX Bias and +33% for VXX Bias. While the year is not yet over, those numbers are lagging average performance in most years. However, when the average annual return is north of 50% per year under a range of varying market conditions with best performance occurring during market drawdowns, it makes sense to stick with a good thing.

We take the guesswork out of the investing equation with a solid set of objective tools to guide decision making. At Trading Volatility our algorithms conduct daily monitoring of a variety of volatility-related data to generate our VXX Bias and VRP indicators which provide us with objective information about the likely direction of volatility ETPs, including VXX, VXXB, UVXY, TVIX, SVXY and ZIV.

Our algorithms continuously measure market data throughout each trading day and publish results on our subscribers' Intraday Indicator page. Our automation also emails and publishes the indicators' final values at the end of each day so that subscribers' can track the indicator of their choosing and act accordingly.

If you find yourself struggling in this market check us out. Stop guessing what will happen and sign up for our daily data-driven indicators for volatility ETPs.  To learn more visit our Strategy page and Subscribe page or drop us a line via the Contact page.

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Hypothetical and Simulated Performance Disclaimer
The results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown. Backtest results do not account for any costs associated with trade commissions or subscription costs.  Additional performance differences in backtests arise from the methodology of using the 4:00pm ET closing values for SVXY, VXX, VXXB, and ZIV as approximated trade prices for indicators that require VIX and VIX futures to settle at 4:15pm ET.


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A Visualization of VIX Implied S&P 500 Movement

U.S. Equities have taken a hit in the first four weeks of October with the S&P 500 declining as much as -9%. The VIX has risen ~108% this month up to 25.23 as of the close yesterday.

As we have noted previously, a VIX of 25 seems a bit low given the magnitude of the daily movements. Below you can see daily S&P 500 returns and their corresponding VIX values on the big sell-off days 10/10/18 (-3.3%) and 10/24/18 (-3.1%).


Based on this historical data, we could reasonably expect VIX to be trading in the 30-45 range. However, the market is apparently not expecting large rallies over the next month.

Recall that the VIX is an expression of expected annualized market volatility over the next 30 days.  A VIX of 25 means annualized move (up or down) of 25%. That value can be converted to monthly terms by dividing by the square root of 12, which yields an expected dispersion of the S&P 500 of 7.2%, or an implied range of 2463-2848.

We can convert that to a weekly and daily basis as well (divide by the square root of 52) to get a weekly dispersion of 3.5%, giving an implied range of 2558 to 2748 from yesterday's close. Interestingly, the 1-week dispersion target for $SPX based on $VIX after Oct 11th was 2820 (it came as high as 2817).

So perhaps $VIX isn't "too low" based on the magnitude of moves. Instead, it's more that investors don't expect a swift rally. Charting out the implied dispersion we can visualize the market's short-term expectations:



We can expect VIX to adjust accordingly as S&P 500 rises and falls. I'll provide updates within the Twitter thread on the subject.





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Have You Become Part of the Buy-and-Hold Equity Herd?

What is your investing game plan?

Has the S&P 500's longest bull market in history, with its 336% gain, finally converted you to become a part of the buy-and-hold equity herd?

Do you think the U.S. equity market is now immune from the carnage we've seen recently in Emerging Markets (MSCI Emerging Market Index is now off 20% from the January highs)? Have you cast aside the idea of a balanced investment portfolio?

You probably don't want to even think about it, but this bull market will not last forever.1 There will be an equity bear market here in the U.S. Non-diversified investors risk facing losses similar to that of the 2000 dot com bust and the 2008 financial crisis. The trap is that we don't know when. Any perma-bears left are still taking on losses, ineptly sitting in cash, or getting crushed by cryptocurrencies.

I personally like an aggressive Modern Portfolio Theory portfolio with a heavy weighting on equities -- but with one important modification. I like to carve out a small portion of my portfolio and allocate it to process-driven volatility trading which is long volatility at times and short volatility at other times.

This is the concept of including volatility as an asset and there are right and wrong ways to do it.

 - Wrong way #1: Buy-and hold a short volatility ETP.
XIV, which was the short volatility ETP of choice, suffered a catastrophic hit in February 2018 and investors lost hundreds of millions of dollars. Prior to going bust, XIV was the "can't lose" fund that returned over 10x since inception in 2010. Many people lost nearly all of their investment and various professional money managers were fired because they didn't know what they were doing and ignored the trouble signs of the underlying assets (VIX Futures). The calamity was so bad, that some brokers banned the purchase of short volatility ETPs to try to protect the average investor (a bit late for that, don't you think??).

- Wrong way #2: Buy-and-hold a long volatility ETP.
If buy-and-hold of the short side of volatility is wrong, then it must be better to buy-and-hold long volatility ETPs, such as VXX? No. VXX and the 2x leveraged UVXY & TVIX ETPs suffer long term decay thanks largely due to the fact that these funds track VIX Futures that are most often in a state of contango. Without getting technical, it should be sufficient to point out that VXX has gone from over $100,000 (adjusted for multiple reverse splits) to $27 over the course of its lifespan since inception 9 years ago.

- The Right Way #1: Our VRP+VXX Bias indicators.
Our volatility indicators put us in cash, long volatility, or short volatility based on daily measurements of various components within the volatility market in order to provides us with a "flexible" fifth asset (the others being equities, bonds, real estate, and commodities). To take diversification one step further, our volatility trading indicators are comprised of multiple unrelated component indicators. No single indicator is perfect and ours are no exception. When they don't agree on what to do we move our volatility allocation to cash (this by the way, is how we survived the February volatility market imploded).

One really nice aspect of our VRP+VXX Bias algorithms, in addition to being fully automated, is that they get us invested in an asset that is non-correlated with other assets. This is key to good diversification within a portfolio. Why? Because if you are diversifying using an asset that has high correlation to another invested asset, you are diversifying in name only while both assets carry roughly the same performance.

The flip side of the non-correlated asset coin, however, is the fact that there will be times when our indicators lag the market. 2018 has been pitiful so far and this can be frustrating if you are not looking at the big picture. And that is, a properly diversified and properly balanced portfolio will excel long term.

At any given time there will be a lagging asset within a diversified portfolio. Smart investors don't just scrap an asset class after a bad month/year -- they rebalance and focus on their process knowing that the next year is likely to result in an entirely different outcome. Otherwise, the investor is left with a portfolio that carries less diversification, greater risk, and a lower long-term return potential.


Our indicator's performance speaks for itself with actual automated signals and trades tracked by a third party since 2016, Collective2, here:


Looking further back using our modeling, we can see how VRP+VXX Bias ("Trading Volatility 1" performs in a variety of market conditions. By far, the best performing years for our indicators are when strong equity drawdowns occur, as can be seen in the chart below.


Trading Volatility+ subscribers have access to our VRP and VXX Bias indicators, our intraday indicator data, receive emails with preliminary and final change alerts for each of the indicators as well as our daily summaries, and interact with our private community of volatility traders in the forum. If interested, you can learn more about our services on our Subscribe page.

As always, each day's indicator values, buy/sell triggers, trade performance summary, and equity curves are tracked in the spreadsheets linked at the bottom of our Subscribe page. Additional information on our trading strategy and indicators can be found on our Strategy page.



Our indicators are also utilized by a volatility investment fund that is open only to accredited investors. If you think a managed volatility fund might better fit your needs please send a message through the Contact page.


Footnotes:
1 Smart people like to pretend they know why this bull market will end: the end of fiscal stimulus, rising interest rates, inflation, deflation, stagflation, global recession contagion, too much debt, high P/E ratios, trade wars, etc. No one knows the why or when and the average investor is unlikely to guess the when, and how it plays out, and be able to invest appropriately.

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Hypothetical and Simulated Performance Disclaimer
The results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown. Hypothetical and backtest results do not account for any costs associated with trade commissions or subscription costs. Additional performance differences in backtests arise from the methodology of using the 4:00pm ET closing values for SVXY, VXX, and ZIV as approximated trade prices for indicators that require VIX and VIX futures to settle at 4:15pm ET


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