Friday, August 18, 2017

Current Market Volatility and Lessons from 2016

  • Overview of July / August market action
  • Performance milestone of Investment Strategies
  • Lessons learned from 2016 draw-down and positioning for effective investing

Recent Market Action
Yesterday we saw a significant downdraft in the markets with SP500 down over 1.5%, while Nasdaq was down ~2%. Although this kind of behavior is nothing new for market watchers who remember 2008, it was a surprise for many who had forgotten that volatility can even rise. And not only rise, but bite very hard.

Although 2% decline in one session is good for some investors - those who are looking for cheaper stocks or are short the market, it is very scary for other market participants who are long stocks. These are the type of market conditions (volatile and uncertain), where a "Market Neutral, Absolute Return" strategy shines out among many other options.

Such strategy when combined with algorithmic rigor and proprietary indicators can not only give you peace of mind during down turns, it positions your portfolio for significant rallies. Following chart shows SP500 since the beginning of July 2017. It is evident that SP500 went sideways for over 1.5 months (+0.3%), while our portfolio strategies performed very well (Up 3.8% and 9.1% excluding fees).

Disclaimer: Performance numbers do not include fees and past performance doesn't guarantee future results
Historical Perspective
Overall, it has been a very interesting year with a rising global stock markets. However, riding the rising market has not been easy because of constant uncertainty. On one hand, financial media pundits highlighted that the equity markets are over-extended and one should prepare for a potential decline, while on the other side, they kept recommending staying long and buying in the market because of multitude of reasons. As a result, it became very difficult for a regular investor to invest in the market - let alone the volatility that we are experiencing right now. 

Although this makes things difficult, the good news is that this is nothing new and hence can prepare us for the future. Markets, financial pundits and media always behave like this. I have seen this over past 9 years of writing about the markets, and through the history of the financial markets whether in 1929, 1960s, 1980s, 1990s or 2000s.

In order to counter this continuous propagation of news that negatively impacts one’s portfolio, we developed our proprietary “Market Neutral – Absolute Returns” strategies. In 2016, we only had a conservative strategy, which performed very well. In 2017, we launched an aggressive strategy along with the conservative strategy. These strategies have performed extremely well in 2017.

Last week, we hit a major milestone – New all-time highs in the Conservative strategy, as sown below. If someone is interested in numbers, please contact us using the link below or e-mail at:
Disclaimer: Performance numbers do not include fees and past performance doesn't guarantee future results
Last time, this strategy had reached these level was back in Aug 2016. Last 12 months have taught us very important lessons that have helped us improve our performance parameters and discuss investment approach in a very holistic form with our clients, rather than providing pointed near-term solutions. 

Lessons Learned: 
  1. There are no guarantees but being persistent is the key to long-term success
  2. Understanding that a portfolio can and will decline
  3. Reduce exposure on sharp gains even if it means to leave a loved position
  4. Probability plays an active role in the markets
  5. Fundamental reasons typically come out after the price action has already taken place or started
  6. At times a trade might seem counter intuitive because of perception
  7. Keep Learning: Improvements & Realization

We will analyze all of these learning in greater detail in next few blog posts. If you have any questions, please feel free to contact us on Twitter (@Survive_Thrive) or via e-mail.

What are we doing?
We have incorporated all of the lessons learned into our strategy algorithms' business rules. We hope that the implementation of these business rules and algorithmic real-time allocation will significantly improve portfolio results over the long-term. 

We will be testing the results over the next few months and could result in a new strategy for clients. Existing customers will get access to new strategies at a discount.

Markets are at a critical juncture. However, knowing this is one thing and acting on this information is totally different in our experience. So far in 2017, we have mentioned several big moves on this blog and on twitter, but doubt if effective trading was performed around this analysis.

At this critical time, we are using proprietary models to expose clients to positions that have the highest success probability.  Performance - H1 2017 

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