EZV Algorithms: I Smell A Bear Trap; Maintain Perspective While Others Panic

Oct. 04, 2019 3:29 PM ETIEF, VIXY, SPY, DIA, QQQ, IWM, SSO11 Comments


  • I smell a bear trap here, but I’ll explain why if I’m wrong, it’s okay anyway.
  • EZV Algorithms metrics continue to indicate ‘hold’ and the ISM data that set the market on its ear is not quite what headlines would imply.
  • My goal: beat a buy-and-hold strategy by avoiding major downturns. If B&H earns 10% , I want 15%+ and this could be a lesson in how to do it.
  • Probabilitiesskew toward a breakout to the high side despite transient setbacks onsuperficial news stories and the markets natural fear of new heights.
  • One possible concernis that earnings projections could be falling disproportionately vs. the slowinggrowth rate. That would be a materialshift and could produce a risk-off sentiment.

The Dow is down about 800 points from Tuesday through midday Wednesday. Panic is in the air.


The greater the panic, the more important it is to keep perspective and remember the game plan that works in volatile markets.

My game plan is this: My objective is to beat a buy-and-hold strategy ("B&H"). B&H earns about 9% price returns historically, and I know that if I can avoid the worst downturns, I can earn more than 15%. My methodology does not avoid every 3% downturn, but it does provide warnings of major downturns. All warnings are not prologue to major corrections. For every eight warnings, one of them avoids significant losses, and seven produce zero-sum noise compared to B&H. But the one in eight valid warnings, when heeded, produces a near doubling of returns with major drawdown protection.

So, the perspective that gives me comfort is this: Any news-driven gyrations are just noise and the losses (or gains) are consistent with B&H outcomes. If psychology turns toward a significant risk-off sentiment, I'll see it in the metrics and sell before it is truly damaging. That will provide the opportunity to reenter at lower prices and reap bigger rewards. So why worry!

If this market drop is the prelude to a major correction, I'll know it soon and the first few percentage points drop will look meaningless when viewed later. In fact, the way to beat a B&H strategy is to avoid major corrections, so if this is to be one, bring it on.

I find it helpful to view market drivers in three categories.

  1. Fundamentals will drive markets in the intermediate and long term, but they're close to useless for market‑timing purposes.
  2. Headlines and hyperbolic news coverage drive day-to-day gyrations, and they amount to noise.
  3. Market psychology (risk-on/risk-off) drives multi-week cycles

This article was written by

Michael Gettings profile picture
Author of EZV Algorithms
Drawdown protection and outsized returns by decoding the VIX futures curve

Mr. Gettings is CEO of RiskCentrix, a firm that specializes in the establishment of disciplined programs for commodity risk mitigation, the integration of enterprise risk programs with financial management, and support in the area of risk-cognizant strategy formulation. He has 35+ years experience, originally in regulatory affairs with a major utility, then as founder and president of a natural gas marketing and trading firm. As a consultant, for the last 20 years he has developed and implemented innovative approaches to risk assessment and mitigation for utilities, power generators, and energy-intensive industrial firms. More recently he is retired, but for occasional consulting. He manages his own portfolio using many of the quantitative methods deployed throughout his career.

Disclosure: I am/we are long SPY. 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.

Additional disclosure: I trade all the tickers mentioned using the algorithm described. The artificial intelligence algorithm monitors daily
performance and periodically recalibrates look-back horizons and triggers in a step-wise sequence. New calibrations are applied prospectively only, and never applied to the historical period from which they derived. The algorithm described and the discussions herein are intended to provide a perspective on the probability of outcomes based on historical performance. Neither modeled performance nor past performance are any guarantee of future results.

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