Plan To Survive: Be Systematic! (Part 2)

Summary

• Surviving this environment is tough.
• Investors need evidence-based methods (EBM).
• This series will provide some tools.

This year, we will focus on strategy indices which have a low correlation to both stocks and to bonds.

As always, our cutting-edge strategy indices are only available to subscribers, but I hope that some of the strategy indices presented here will provide inspiration for readers to create their own methods for dealing with an increasingly difficult investment environment.

Remember, hope is for people who do not use data. Wise investors plan using evidence-based methods.

Please note that even though the rules of this strategy index have been publicly released, like any other index, we require the execution of a licensing agreement with ZOMMA LLC for any form of commercial use whatsoever.

ZOMMA Quant Warthog III

Rules:

I. Buy ZIV (ZIV) with 15% of the dollar value of the portfolio.

II. Buy SPLV (SPLV) with 50% of the dollar value of the portfolio

III. Buy TMF (TMF) with 10% of the dollar value of the portfolio.

IV. Buy UUP (UUP) with 20% of the dollar value of the portfolio.

V. Buy VXX (VXX) with 5% of the dollar value of the portfolio.

V. Rebalance annually to maintain the 15%/50%/10%/20%/5% dollar value split between the instruments.

Here are the results in a log scale:

The low correlation to long duration government bonds is superb. The low correlation to the S&P 500 is similarly excellent. Here is a graph of the strategy index vs. the SPY (SPY) ETF in a log scale:

The strategy index has a low 0.33 correlation to the SPY ETF. The index beats the SPY by a little over 1 percentage point per year, while reducing the maximum drawdown vs. the SPY by over 10 percentage points.

The intuition behind this excellent performance is that the strategy generates return through the SPLV S&P 500 low volatility ETF and the ZIV inverse Mid-Term volatility ETN.

ZIV tends to truly shine during a sideways market, because it is often pocketing contango, or synthetic time decay.

TMF through its long duration government bond exposure, UUP through its long dollar exposure, and VXX through short-term volatility exposure provide the hedges for the strategy.

In addition, in a rising interest rate environment, long-dated government bonds often get slammed, but the higher interest rates lead the dollar to strengthen, causing the UUP long dollar index ETF appreciate.

Also, a long dollar index position can be an excellent hedge in a deflationary environment.

Moreover, a simultaneous drop in equities and fixed income could cause volatility to skyrocket, making VXX a wise potential worst-case scenario hedge.

Investors who wisely fear that bear markets in stocks and in bonds could hurt their portfolios should consider an index which offers the chance of a low correlation to both asset classes.

Remember, hope is for people who do not use data. Wise investors plan using evidence-based methods. Solid evidence-based technology goes a long way. At the very least, this index is a valuable tool for conceptualizing issues of correlation and diversification within an evidence-based framework.

Thanks for reading.

Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ZIV, SPLV, TMF, UUP, VXX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.