VIX Volatility Model - False Signals

Published : September 16 2016 at 10:42 ET

The model has had a number of false signals since September 14. This is unusual but has occurred before such as between 2-5-16 to 2-11-16 which had 7 false signals in a row (see results table). You will notice that such periods are more likely to occur when volatility is elevated. The model keeps stops tight to minimize any losses from false signals. This way, its profits can more than make up for its losses. 

That said, it is naturally frustrating to have just weathered a series of larger losses from the VIX spike buy signal on 9-9-16, then rebuying XIV on 9-12-16. 

I have examined the last few days of trade from September 9-13, 2016 which are irregular. The irregularities are smaller than those that occurred in August 2015 but irregular nevertheless. The VVM has accounted and adjusted for this new data in the name of risk control. For example, the automatic rebuying of XIV after a VIX spike buy signal will no longer apply. 

While risk control is the most important rule when it comes to investing, the VVM can sometimes use material changes in markets to its advantage. The highly irregular flash crash in 2010 and more recently in August 2015 exaggerated volatility to extremes. The VIX spike buy signals profited immensely from both occurrences. 

So while some may be losing confidence in the way markets in general trade, every problem contains its own solution. Our vigilance and focus remain of utmost importance when it comes to investing.

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