Trap Door Opens....07.02.15

No surprise but the Trap Door setup kicked in at the open.  Hope you avoided that one.  Our AM post suggested a trailing stop on SPY at net zero and that worked out well. If you're not completely exhausted by the Greeks here's Schwab's take...an objective analysis suggesting the "crisis" may be somewhat exaggerated. Nevertheless, traders hate uncertainty and the HFT's love to game it so as noted in yesterday's post Monday may be another blow out day.
Meanwhile, here's the latest MR research and there's been a quantum level discovery in the process.
Below are 2 examples of the XX version with XIV and VXX volatility ETNs as the only inputs.
In the first panel we use a slower momentum algorithm than M3 and we trade only the top ranked issue with a 3.4% limit stop.
In the second panel we use the same algorithm but we maintain an on-going position in both VXX and XIV (equal dollar amounts) at the end of each day and let the 3.4% limit stop cull out the loser as appropriate on a day to day basis.
Note the max drawdowns in each version.  Which one would you trade?  For me the second version is a no brainer.  The risk/reward factor is so attractive that's its hard to make a contrary argument.
The first panel is a true momentum model while second version is essentially a market neutral model trading volatility arbitrage.
Why is there a third ranking slot?  That slot accommodates a neutral outlier as mentioned in a previous post which may or may not be active depending on the current in or out of paradigm regime.
We are currently "in paradigm" based on the position of the equity curve relative to the RSQ line, so no outlier is needed.