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Market Lab Report - Premarket Pulse 3/6/17

Major averages finished roughly flat on Friday after a lackluster day of trade on lower volume.

China released financial projections for 2017 with a GDP rate of ~+6.5% or higher and CPI goal of +3.0% (unchanged from last year) as expected.

Futures are lower as political tensions increased over the weekend, following missile tests from North Korea.

Such news can lead to sharp, short pullbacks in the general markets. The quick deterioration in leading stocks outside of such news can also come as a result of short term general market weakness. As we have noted, a 1-2% pullback in the major averages often leads to pullbacks of a few to several percent in leading stocks. Thus keeping stops tight is key as is buying on constructive weakness so your risk in entering the trade is less.

In relation to the VIX Volatility Model, we repeat a portion of what we sent out this past weekend:

IMPORTANT: VVM is up +39.3% for the year (as of 3-3-17) but keep in mind the current signal's profits of +11.16% using ETF XIV could easily be reversed. The market could have a couple of bad days in a row where volatile ETFs such as XIV could easily reverse their gains. A fail-safe would kick in to minimize any loss so at worst, the trade would be closed roughly near breakeven.

Q: Why cant VVM just switch to cash ahead of such an event?

A: Both real-time and backtests have shown the model maximizes its profits by NOT trying to pick tops or bottoms. VVM can at times switch to cash before such a drop as it has done at times, but that form of insurance comes at a cost. VVM walks the tightrope well as it often avoids getting pushed prematurely into cash while protecting the downside by switching out of its signal if necessary.

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