Q1 2016 Strategy Report - Volatility Trading Strategies

Updated: Dec 6, 2018

2016 started with a bang.  The first week of 2016 was the largest weekly drop for the S&P 500 to open a new calendar year ever, and the broad markets went on to fall over 11% before finding a bottom in mid February.  This also put the S&P 500 down over 15% since the highs reached all the way back in May of 2015.  It’s been nearly a year since the markets printed that high water mark and it’s got everybody wondering what will come first?  Will we catch a second wind and go on to make new market highs, or will the next recession come before that happens?  I guess only time will tell.

Our Volatility Trading Strategy performed it’s job perfectly though during this volatile period remaining in cash during the entire market decline which started in late 2015.  Remember losses are more costly to a fund than gains are beneficial, so our primary focus is always on risk management and mitigating losses to the least possible amount.  Only taking the high conviction trades and moving to cash when signals are ambiguous is the reason we continue to crush the markets and outperform our peers in the volatility space.

Now the big question on everybody’s mind is, what comes next?  When markets hit that bottom in mid February it really did feel like the end of the bull market and perhaps the start of another prolonged decline into a global recession.  It’s getting really hard to justify a long stocks position at this point with so little positives to point to in the global economy.  The Federal Reserve has picked up on this and have changed their language significantly from just three months ago.  They’ve now basically come out stating they will be putting their interest rate hikes on hold for the foreseeable future.  Keeping with the same pattern we’ve seen for the last several years, when the Fed gets dovish market participants respond positively and we saw a very strong bounce in the markets.  I for one don’t buy it though and I’m very curious to see what will happen as we approach the highs from last May.

Regardless though we don’t trade with a crystal ball and we never act on any personal market predictions of any kind.  We trade the math and follow our proprietary indicators.  We’ll trade what the market gives us, no more no less.

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