VDX Updates, MOD and More...04.10.16

Looking forward to next week earnings continue to set the trend.  Technically, the charts suggest a bearish skew but there are underlying currents in the bond sector (where short interest is huge) that may frustrate our algorithmic strategy.  For example, even though TLT faltered on Friday the OTM calls collapsed far beyond the value normally ascribed by implied volatility.  And, on Thursday, even as TLT was performing like a rocket the OTM calls were actually flat.. I look at these things during the trading day just for possible clues as to what the big boys are doing and lately there have been more than a few decouplings like the TLT/option behavior.
Bottom chart is latest consensus sector interest courtesy of State Street.

Delta Neutral Best Odds Entries....04.08.16

The popularity of the delta neutral approach appears to be increasingly based on the number of questions I receive and based on the squirrelly behavior of the markets recently its easy to understand why.  One continuing question is..."Is there a time when the odds of a good delta neutral entry are better?' and the answer is "Yes".
Below is a snip of the M3 delta neutral volatility and stop charts and yellow arrow lines indicate situations in the skew and TrendX charts and patterns on the stop charts that typically offer the best odds for detecting impending volatility pops and hence good delta neutral returns.
On the Skew and TrendX charts the crosses of the zero line indicate periods when long/short volatility is neutral and the odds for impending volatility pops are highest (which we want to capture with the DN tactics).
On the ATR, PCL and OC charts we look for patterns where the trend lines are hugging the RSQ line. When the P6 has diverged significantly from the RSQ line these are poor times for new entries as it indicates at least a short term volatility spike is already under way.
On the lower 2 year composite stops chart we look for periods of volatility consolidation which can actually last for several months when the markets are stagnant. The longer the flat pattern the better since as time goes by there are only 2 directions left...up or down... and often with some gusto.
Final question>  "Can the delta neutral model produce returns in a flat or stagnant market?"  And again the answer is "Yes"...but we need to reduce the size of the limit stops to reflect a lower volatility trading environment (let M1 run the numbers for the best current setting) and the trailing stop may also need to be increased to allow the trades more "breathing room".

Back to Delta Neutral Basics...04.07.16

Bit of a FED backlash today as yesterday's happy dovish FED minutes were rethought as an indication of global weakness, uncertainty and hence, danger.  It was an S2 pivot day for SPY  on sub-par volume (surprisingly).
Gold and TLT (bonds) were the big winners as the VIX jumped 18% at one point.
On days like today the true worth of the delta neutral SSO/SDS (SPY X2) model becomes apparent. Not everyday is a big winner like today but the DN tactic does produce a steady ultra low risk return when properly monitored and with a trailing stop in place.
The lower panel shows the relationship between the previous close to low, (PCL),  ATR and open to close (OC) trends....all nicely aligned....the type of synchronized pattern that bodes well for high probability trading odds.

TLT WIth the MOD Dashboard...04.06.16

This is the MOD view of TLT (20 year treasuries) as of Tuesday's close...a pretty dramatic signal to the short side which was played out in today's action...along with the bullish MOD signal for XLE forecast yesterday. I'm continuing to tweak the pair portfolios (not the algorithms) to find which correlated pairs really do provide a tell for impending reversals.
An attractive feature of this TLT/pair MOD using various world currencies as the B side of the pair is that virtually all the gain comes form the TLT side of the trades.  This is an important distinction to make when analyzing the MOD dashboards.  If  the % returns are skewed in favor of the B side of the pair then there's a lot more trading involved to generate the posted returns and the trading model itself loses its utility as a consensus model focused on a single issue...in this case TLT.
The new MOD is still a work in progress as I build a portfolio of trading pairs but recent efforts have certainty been encouraging.

PONZO Updates and XLE MOD....04.05.16

This week's SPY and VIX Ponzo forecasts essentially favor a neutral stance at least short term.  The VIX in particular looks fairly benign and, as mentioned yesterday, earnings season will be the near term market dynamic.  The SPY chart looks a bit more risky than we're actually likely to experience but keep in mind these scenarios are just reflections of what happened over the past 25 years when SPY was in the current cycle.
I've profiled the XLE MOD dashboard to illustrate what types of high linearity returns this type of multiple pairs analysis can produce. This particular mix of XLE based pairs covers the gamut of XLE linked associations and delivers a nice consistent signal, so far. It would be more attractive if we saw a higher number of AP signals but once again patience is the watchword and we'll just standby until the AP signals dominate...that's the time to scale up trade size.

M6 Market Model Lags Short Term...04.04.16

It was another low, low volume day with negative breadth and generally slow going off overbought levels on Friday. Wednesday FED minutes may prompt some action but it's hard to imagine more bullish reaction to the FED than last week.  Earnings season is about to begin and that will likely be the catalyst that drives market momentum for the next few weeks.

VDX and MOD Updates....04.02.16

This week's SPY and VIX VDX charts are a bit divergent.  The SPY is now oddly NOT overbought according to the VDX, suggesting risk off for more possible SPY gains.  The VIX chart is noncommittal suggesting a possible consolidation or range bound scenario for the near term..
And then there's the TLT MOD outlook which is neutral to down.  This is the same outlook as the TLT/currency pairs MOD that was posted last week so there is consensus on those odds.
TLT did go ex-div on Friday so the distribution skewed the neutral closing.
Note that the high odds AP signals on the TLT are now net short.