Market Notes - Week of 9-28-2015

In the words of the legendary Charlie Munger, "Investing isn't supposed to be easy. Anyone who finds it easy is stupid."

This quote seems to go double for volatility, which is known for big moves and catching people off guard. With that said, VIX futures remain in backwardation where they have been, almost without exception, since 8/20. The net effect on VXX has been positive over this time, moving from the mid-teens to the mid-twenties. However, this move has been anything but smooth sailing with VXX reaching as high as $31 and as low as $20 -- now trading at the midpoint of $25.

We got shaken up a quite bit during the week of 9/14 on a strong rally in SPX and a brief flip to negative for the VXX Bias. VXX Bias is again positive and will provide a small tailwind to VXX. My estimate is that VIX futures will remain in backwardation as long as VIX remains above the 21 level.

VRP remained positive last week, indicating a buy for XIV. The reason it has remained positive is that selling in SPX has been slow but persistent, which keeps actual volatility low compared to VIX. However, the persistent small down days can be misleading when viewed from an actual volatility perspective and can lead to larger down days as downside momentum picks up. This is a weakness of VRP strategies. Under an ideal selloff scenario we would need to see a mix of up days and down days in order to increase HV5 and cause VRP to flip to negative. There's a chance of this happening this week as SPX attempts a run at the 1960 level but I'm not entirely confident that we'll get it in this environment.

For that reason, my patience with VRP is getting thin and I'm thinking of putting some extra weight on the VXX Bias signal to execute a buy in VXX. If I do make a trade that deviates from the VRP+VXX Bias strategy, I'll post a comment in the new journal section (I will also disclose any trade stops there as well). If you'd like to receive immediate updates on journal entries you can set your preference on the Alerts page.

Posted to Trading Volatility on Sep 27, 2015 — 1:09 PM

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