Off your game?
Read our free Dr K report on how to optimize your mind and body so you can boost your focus when trading the markets.
Dr K VIX Volatility Timing Model (VVM)
- You will receive an email whenever the model switches signals.
- Choose from the list of suggested ETFs. Buy the ETF.
- Await the next change in signal.
Overview of VVM:
The VIX Volatility Model uses price/volume action of leading stocks, a dynamic list that is updated as needed, and major averages to capitalize on changes in volatility in the market. It uses regression to the mean as well as trending strategies depending on market conditions. That said, it does not require an uptrending or downtrending market to be profitable.
The VVM incorporates a number of strategies which can profit from a broad spectrum of market behaviors. For example, the VVM excels in trendless or downtrending markets where volatility is amplified. It also knows how to ride uptrending markets which tend to be less volatile.
That said, I would like each member to read this FAQ on potential weaknesses of the model.
The model has gone through a series of evolutions or "growing pains" similar to software that updates, making improvements and removing old bugs. Indeed, the challenging markets that have become ever-more challenging with each passing year have been a gift. The model is that much stronger for it.
CAUTION: Make sure you understand the risks involved in trading this model before risking any capital. Know that big gains can be reversed under unusual circumstances, such as when the VIX had one of its worst one-day losses on April 24, 2017 in decades which resulted in a loss of 26.82%, a single signal record loss for the VVM. Any strategy with big potential upside will also have big potential downside though various fail-safe strategies within the model have been fine-tuned to strike a balance between reducing the number of whipsaw losses while keeping maximum losses, notwithstanding gap-downs, also manageable.
Not shown: Backtests using VXX start 2/2/09. Prior to 2/2/09, backtests start 3/10/99 using QQQ.
IMPORTANT: The VVM shot up +54.3% from 11-8-16 to 3-17-17. It then went through a major challenge after the adjustment was made live on 4-3-17 resulting in its largest drawdown since 2009 (see table below).
After further fine-tuning due to this drawdown, VVM avoided a big loss on 6-29-17 by moving to cash on 6-27-17. We were also quick to call the start of the correction in tech stocks on 6-9-17 as you can hear in our real-time webinar starting at 8 min 12 sec.
Sharp one-day sharp drops which wipe out a month's worth of baby-stepped gains in the major averages have been the rhythm of the market for much of 2017, an unprecedented occurrence in the major market averages. Indeed, QE manipulation prevents meaningful corrections from occurring. The worst correction in the major averages so far in 2017 has been a scant few percent. Volatility instruments such as XIV which the VVM buys when sensing flat or uptrending markets can lose big all of a sudden during such one-day selloffs. Such action is highly unusual for the XIV which usually gives warning ahead of the drop.
Adding to the challenge, volatility has been at all time lows so far in 2017. VVM is up from its lows as it makes its way back, though in this unprecedented ultra-low volatility environment (as of this writing on 7-16-17), gains are slow. Fortunately, markets change.
To give members a clear understanding of real-time trading using the signals from this strategy, the results shown below were achieved from an actual member up through the 5-17-17 cash signal. This was nearly an identical match to our own records thus any differences in price from the time a member receives a change of signal email to the time they execute the trade seems to be a wash.
When the model issues a sell signal, it is selling volatility thus anticipating rising markets. When the model issues a buy signal, it is buying volatility thus anticipating falling markets.
You will receive an email whenever the model switches signals. Choose from the list of suggested ETFs. Buy the ETF. Await the next change in signal.
BACKGROUND: VVM went through a series of adjustments, ie, growing pains, which were all finally in place as of 11-8-16. Because of these growing pains, $10,000 had been reduced to $5,996 by 11-8-16, but with everything in place, the model then shot up +54.3% through 3-17-17 to $9,252 in real-time, an excellent sign. Another adjustment was then made starting with the 4-3-17 sell signal. This adjustment had been tested from 9-19-16 through 4-3-17 in real-time before making it live on the website to insure the backtests would prove out. All too often, if a system is over-optimized, going forward in real-time will end up in losses. In this case, gains were in the high double digit percentages. Nevertheless, once the changes were made live on 4-3-17 based on these promising results, VVM experienced its largest drawdown due to the market aberrant reasons cited above.
Some have asked why not just remove the adjustment made on 4-3-17? As discussed here, the adjustment greatly reduces the number of trades closed at a small loss while allowing much larger profits to accrue. I will be closely monitoring the performance of the VVM before and after the adjustment made on 4-3-17.
UVXY is used for buy signals, XIV is used for sell signals. UVXY moves up or down twice that of XIV. If XIV is up +5%, UVXY would be down roughly -10%. More conservative investors may opt to use VXX or VIXY.
|Date||Signal||% gain / loss||$10,000 becomes|
|04-03-2017 *||Sell||-10.26||8,156 *|
|11-08-2016 **||Cash||5,996 **|