A simple market timing model

While no market timing model will perfectly save you from all price drops, a fix as easy as using a 9-month simple moving average can improve the performance of your long equity portfolio. Performance  is superior to buy and hold - not only in terms of absolute gain, but also with lower risks (volatility of portfolio and drawdowns).

Jan 1994 - Aug 2017
Portfolio Initial Balance Final Balance CAGR Stdev Best Year Worst Year Max. Drawdown
Timing Portfolio $10,000 $120,581 11.09% 10.04% 38.05% -4.42% -15.28%
Buy & Hold Portfolio $10,000 $82,060 9.30% 14.45% 38.05% -36.81% -50.80%

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How to time your mutual fund investments

Short answer - don't.

Summary:

  • Investors generally time their entry and exit of mutual funds badly, going in and pulling out at wrong times, such that their realized returns are lower than the fund's reported return
  • For most investors, it is better to simply buy and hold mutual fund investments (after doing necessary homework) rather than actively trade it
  • For those wishing to exploit this tendency and generate a return higher than the mutual fund itself, the paper has generic details

 

Timing Poorly: A Guide to Generating Poor Returns While Investing in Successful Strategies
JASON HSU, BRETT W. MYERS, AND RYAN WHITBY

Tactical Short on VIX

Friday was a possible decision day that turned out as not. Seems like too many were waiting on the sidelines to make a decision based on other people's decisions.

For context, we have two spikes in the VIX (two market drawdowns) just 7 days apart which is not what many are used to, given the lull in most parts of 2016-2017. Most drawdowns were quickly corrected (the one on 10 Aug a bit too quick) and the slow upward trajectory of the market resumed, so it's not usual to see a sudden drawdown occur again in quick succession. What happens after this will be telling of positioning and risk appetite.

Because of that, the below possible short trade will need to be tactical and of limited risk.

Tactical Short on VIX via Long SVXY or XIV via option spreads (vertical / diagonal) for a limited risk position

Example for SVXY: Current price 70.5, Sell 01SEP17 82 Call, Buy 08SEP17 83 Call for a debit spread of 0.35 - downside risk of $0.35 and lower breakeven at 75 and projected profit peak at 82 for $1.80 and second upper breakeven at 86 with max upside risk of $1.33

If this current drawdown mutates into a deeper correction, expect the VIX to remain elevated and the ETFs to lose even more value - this is why the position risk should be limited as this may be like trying to catch a chopper not just a knife. If the drawdown abates and things go back to 'normal', position for a gain within 2 weeks - a very rough guide.

We are at 24% drawdown on SVXY which is a reasonable first entry buy point (40% and 70% are the other possible buy points).

Regarding longer term holding periods, the chart below shows the distribution of the 250-day holding period returns is positively skewed, with only a small percentage exceeding <-50%. This should provide a baseline for expectations.