Updated: Nov 3, 2020
If you ask any two people their opinion on where markets are going, chances are decent you'll get two different answers. Just like if you ask two people their favourite flavour of ice cream, again you'll likely get different answers. Yes, I just had some killer ice cream yesterday (Cows in Whistler, BC) so the analogy is fresh in my mind :)
The point is, most of what people talk about in the markets is subjective, it's opinion. One of the important things I do here at VTS is try to bring as much fact and concrete numbers to the equation as possible. That's what the Volatility Barometer and Volatility Dashboard are.
They are facts about specific areas of the market in an otherwise subjective investing world.
Take the 2nd metric in the Volatility Dashboard, M1:M2 VIX futures contango. We could all go back and forth all day long about where we think it'll go tomorrow, but one thing we cannot dispute is the numbers. It's currently at -1.49%, which is the 12th percentile. That means there have only been 12% of trading days back to inception that it was lower than right now.
So we have an indisputable fact about M1:M2 VIX futures, but what do we do with it? Do we move back towards the subjective and give our opinion as to what that means for markets going forward? We could do that. What do you think it means? Does it mean we should short VXX? Do we buy it? Again we all have opinions, and in the next few days you'll see plenty of those. You'll see people today in fact all over the place saying that it's time to jump in and short volatility again because markets are going to bounce. Really? Are they? Maybe, but then again maybe not. Isn't that just an opinion?
I suggest a better path would be to stick with facts. I can say with certainty that shorting VXX when M1:M2 VIX futures contango is less than -1.49% has historically led to poor performance.
And the same exercise could be done with dozens of different metrics in an infinite number of different combinations. The Volatility Barometer, the Volatility Dashboard, the cash VIX term structure, and many more. Welcome to my world. I've crunched the numbers on volatility ETP trading thousands of different ways accounting for as many variations as I can think of for a decade now. I've done all that so you don't have to.
And while it's not an exact science and there's plenty of times when my signals turn out to get it wrong in the short-term, I can say with confidence in the medium to long-term there are some concrete factual answers as to what are the best indicators that lead to the best performance.
You can go anywhere to get someones opinion, and perhaps if you're lucky you'll find someone who's opinions tend to lead to good investment results. To be honest though, given what we know about financial industry performance that's not likely. But everybody on CNBC and everybody on Twitter has an opinion.
In my opinion, opinions don't matter. If something can't be modelled in a formula, I don't use it.
None of my trade decisions are made based on my opinions. They are all based on careful mathematical analysis of the facts. And the fact is, given where all the volatility metrics are right now, it is not advisable to be long the stock market or short volatility. That would be a pure gamble, going directly against 15 years of historical data. It's certainly possible short volatility makes 10% or more the rest of the week, who knows. But based on all historical evidence, the odds favour not taking that trade, so I won't.
Patience and reliance on facts is how I'm going to play this latest bout of market volatility.
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