Volatility’s dramatic move from a latent 10-12 to about 30-50 in days was not normal.
Yet this past week saw an almost complete turnaround. By Friday, the VIX had fallen from 50 on February 6th to close the week at 16.
We’ve had dramatic market moves before but typically they occurred over a longer period of time – weeks or even months – not a few trading days. By today’s standards, that would be an eternity. In fact, in today’s trading world, there could be, as we have seen, two to three corrections over several weeks.
Prepared for that? If not, best to buckle up and put your helmet on.
Will volatility just go back to sleep now, as it did in 2017? Is the correction over? That’s anyone’s guess. However, investors are still grasping for performance and yield. This means with strong earnings growth and a rock-solid economy, equities are still the place to be.
A reason being thrown around for this hyper-speed correction is that we have entered a “Brave New World.” A world fueled by split-second reactions made by … drum roll please …algorithms causing any kind of correction to “overcorrect.
Algorithms are agnostic on market direction but ubiquitous in markets. Firms like Goldman Sachs and Morgan Stanley may get the headlines, but algorithms are the real force today on Wall Street. Today, algorithms are the 900-pound gorilla in markets, playing a role in the vast majority of securities transactions.
I’m sure you’ve had your fill of my musing that 75% of all trades on Wall Street are directed by algos. When you read that JPMorgan estimates fundamental discretionary traders account for only about 10 % of trading volume in stocks today, you get the feeling the percentage of trades done on Wall Street by algos is a lot higher now.
So this sort of environment is probably here to stay. Sleep, Run at hyperspeed, Sleep, repeat.
QiT Loves Volatility
QiT loves volatility but that does not mean we can sit back on our laurels.
Just as we are ready to sit back on our laurels. and enjoy a few bubblies. they disappear like compost in your garden. We have to always be changing, optimizing, and looking to leverage the environment we are in.
A New Project
I’ve started work on a new project I’m christening SOS (System of Systems). I’ve been thinking about this for a long time now and have all the pieces in place.
So what exactly is a system of systems in 10 words or less? “It will rotate between the most profitable strategies.”
Ha, did that in 8 words!
Unfortunately, that didn’t explain the strategy like it should have. This is because I’m not at the point of even testing, let alone launching it. I hesitated to even mention it but I need to address an issue before I lower the pail into the well.
This is a rotational system, where we would rotate from one strategy to another based on some parameters that are yet to be refined (notice I said refined not defined)
When I talked to a member recently – I chat with members quite often – I lobbed this strategy out to him. I told him I was spending a few neurons on building a rotational system. His response was no surprise to me.
“As you have said in the past, it is best to keep the same portfolio through thick and thin. As soon as you jump ship, the portfolio you were in rebounds and the one you changed to drops like a rock. Bouncing back and forth might always keep you in a downtrend. Of course, if everything works as planned, you are always in a winning portfolio.”
Chasing vs. rotating
I have always, and still do, advocate you should not hurdle from one strategy to another chasing the best performer. This is a formula for disaster, IMHO. Mainly because:
- What is the best?
- How long has it been the “best?”
- When do you jump to the next?
- Does this really improve my bottom line?
Is this something you would want to trade?
What I’m talking about here is a rotational system based on a PLAN. A plan that has been backtested and well thought out. Moving from one strategy to another without a plan is chasing. Moving from one to another based on a plan that will improve (or smooth out) performance is “rotating.”
With that said, I would love to hear from you if you think this is a system you would be interested in. It will take a lot of time and energy to build it and would like to know how many would like to see it.
We’re the Plan in “Plan your Trade and Trade your Plan” – TraderJanie
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