Since mid-June 2012, a couple of critical changes have been made to the TVIX/UVXY model, and the results in real-time have been proving out. The strength behind the UVXY model appears to be market direction independent. In other words, the model appears to be profitable whether the market is trending or moving sideways. By contrast, Market Direction Model (MDM) works best in trending environments. Fortunately, over the many years that have passed, markets tend to prefer to trend just enough such that MDM has managed to outperform in every market cycle. Note, this assumes going 100% long, 100% short, or 100% cash at the time of the change in signal.
That said, while backtests of the TVIX/UVXY model have proven out, we need more data to prove statistical significance in real-time. Once we are satisfied, we will let all members know. In the meantime, buy and sell signals emailed in real-time are still in beta form. Please check back over the ensuing weeks if you wish to only trade the TVIX/UVXY model once the model is non-beta.
The following is standard and will be included in all future TVIX/UVXY signal change reports:
Work in progress(beta): As we have said, TVIX/UVXY is a work in progress, so anyone using it should be aware of this as well as to understand the wide risk band in this model. While backtests have proven out, we need more data to prove statistical significance in real-time. Once we are satisfied, we will let all members know. In the meantime, buy and sell signals emailed in real-time are still in beta form. Please check back over the ensuing weeks if you wish to only trade the TVIX/UVXY model once the model is non-beta.
Fail-safe: The fail-safe is placed at -19%, which, assuming a maximum position size of 10-20% as suggested below, would impact an account by -1.9% to -3.8%. This -19% is an approximate guide since there may be the situation where the -19% is slightly exceeded, yet the model maintains its signal, anticipating a reversal in the short-term trend. The -19% level is derived from backtested data showing a number of profitable signals can go nearly -19% against before turning profitable. Meanwhile, should the fail-safe trigger, members will be notified. As stated, this is a work in progress, so the addition of this fail-safe greatly reduces risk on individual signals which can go as much as -38.2% against as shown in backtests, and as much as -80.8% intraday (though that particular trade ended up being mildly profitable).
Borrowing shares: Most brokerages should be able to lend the shares so you can short either UVXY or TVIX. For example, Charles Schwab allows one to short UVXY at 9% annual interest, so it is in a sense treated as if you were on margin, albeit at a higher rate of interest. Since these trades are on the order of days to weeks, only a small slice of the 9% annual interest would apply. If your brokerage does not allow you to short either, you could buy twice the XIV which is the 1-times inverse, or attempt to short twice the VXX which is the 1-times normal:
TVIX 2-times normal
UVXY 2-times normal
VXX 1-times normal
XIV 1-times inverse
Position size with care since these ETFs can be very volatile.
Note on TVIX/UVXY BUY signals/Position sizing: Most buy signal TVIX/UVXY trades will be short-lived, often on the order of a few days, as we seek to capture short-term gains. Due to the volatility of TVIX/UVXY, these short-term gains can be substantial. Losses can also be substantial so position size at our suggested maximum of 10-20% of your portfolio. If you have not done so already, please read the text that accompanies the TVIX/UVXY table here: https://www.virtueofselfishinvesting.com/results/dr-k-tvix-uvxy
Note on TVIX/UVXY SELL signals: Sell signal TVIX/UVXY trades, on the other hand, can last longer as sustained uptrends (TVIX/UVXY prices usually drop during uptrends) tend to last much longer than downtrends (TVIX/UVXY prices usually rise during market corrections).
TVIX/UVXY vs MDM: A change in signal in the TVIX/UVXY model may not coincide with a change in signal in the Market Direction Model (MDM). TVIX/UVXY model signal changes will occur more frequently than MDM signal changes.
Hedging: TVIX/UVXY can be used as a hedge in certain circumstances. TVIX/UVXY buy signal means the TVIX/UVXY model is anticipating a short-term (few days or less) market pullback. Since TVIX/UVXY are volatile, a gain of a few % or more can be made in just a few days or less is the signal is true, based on our backtests. Thus the Market Direction Model (MDM) can be on a buy signal, while TVIX/UVXY can smooth out returns by being up as the market has a minor (1-2%) pullback. MDM would remain on a buy it is designed to catch longer term uptrends.