Volatility Matters

We have mentioned before in this weekly email blog that volatility plays a central role in our trading strategies and we believe it provides a unique edge that can earn above average returns with a low correlation to the market. One example is the last long stock market position (TQQQ) held by the Forte Strategy that was exited on February 27, three weeks before the market bottom on March 23 and avoided a painful 30% decline (we’ve traded the gold and oil markets a few times since then, but still no stock market positions as volatility remains high as shown below).

This week we studied the market volatility generated by the COVID19 pandemic within the context of other historic bear markets. For the purposes of this study, a bear market is defined as a spike in volatility that is four times greater than the total volatility of the Dow Jones 30 for the period from 1985 to the present. We used a simple definition of volatility as the 10-day moving average of the standard deviation of open-high-low-close prices divided by today’s closing price. The graph below shows that there have been six volatility spikes greater than four times that average over the past 35 years resulting in an average market decline of 34%:


Then, we considered the aftermath – how does the market perform after a 4X spike in volatility? And more importantly, what does it possibly suggest about the future of today’s market (if anything)? The table below summarizes the data for peak-volatility events meeting this criteria:


A few observations can be made from this data table. For one, there are only two examples of a V-shaped recovery, the Russian Debt Default (1998) and September 11, 2001. Both of these where fairly isolated events and experienced about half of the magnitude of the volatility spike of the three major global events (Black Monday, the Financial Crisis, and the COVID19 Pandemic). Also, within less than 40 days after these two spikes, market volatility had returned to normal. And, in all cases except for the 2008 Financial Crisis, the volatility spike was at or near the market bottom. Lastly, the post-spike market performance of today’s market is the most bullish 30 and 60 days ever realized after a peak volatility event. This is an outlier compared to all prior events, especially the other two large spike events, Black Monday and the Financial Crisis, which were either flat or declined during the 30 – 60 days following the spike.

We’ll narrow our study to three large, global events where the volatility spiked 7X or more: Black Monday (1987), Financial Crisis (2008), and the COVID19 Pandemic (2020). The graph below shows the overlay of these three time periods. The lines show an uninterrupted series of days where the volatility was at least 10% higher than the average. It’s interesting that, by using this definition, you can see that the markets become volatile at least a month before the peak sell-off and it was another 4-5 months before the volatility returned to a normal level. The last data point for the COVID19 line is Thursday, May 28 where the green line is sloping upward and is at the highest level over the last month.


The graph below shows the market performance before, after, and during the volatility spike. The start and end points of the graph are when market volatility was at least 10% higher than the average leading up to and after the major spike event. You can see that both Black Monday and the Financial Crisis both had a 2nd wave of market declines that came near the spike bottom or exceeded it even though the volatility remained below the 4X threshold after the initial spike greater than 7X.


As we worked on this research, it prompted several ideas on a new trading model structure that is based solely on volatility. It’s compelling that the market volatility was elevated at least 10% above average at least three to four weeks prior to the major sell-off and then remained relatively high over the following four to five months. As stated in the opening paragraph, this has been the case with our current trading model for the equity markets which are, however, currently more complex than a simple in/out approach based solely on volatility data.

So, what does this analysis suggest for today’s market? We believe that, given the scale of the March volatility spike and striking similarities of the patterns compared to Black Monday and the Financial Crisis, we’ll see a second leg-down sell-off in the market which will come within 10% of the March lows and possibly exceed the low as that we saw during the Financial Crisis. At a minimum, the volatility will persist for another six weeks and likely up to the November elections; however, a lot has changed since 1987 and 2008 as we now see quick and active intervention by central banks around the globe with a seemingly infinite ability to create money, willingness to distribute to the populace and purchases assets in the open markets (in some countries). Although the first 60 days of this bear market look quite similar to 1987 and 2008 progressions in some ways, there is some chance that the intervention by the central bankers explains the unprecedented bounce seen in the first 30/60 days and this level could be sustained from here or even accelerated.

Forte Strategy Update

Here’s a short update of the Forte Strategy trading activities for the week. The equity markets remained at elevated levels of volatility for the week which left these trading models inactive; however, the volatility for the gold and oil markets remains at a level where trading models are active. We executed four trades in the gold and oil markets which netted a loss of 0.6% for the week which created a total loss for May to 0.7%. Our full year net results so far equal a 2.0% loss compared to a 5.8% year-to-date loss for the S&P 500. More details about our trading activity can be found by registering on the Collective2 website and searching for Forte Strategy. A running list of these email blogs and general information about Maestro Capital Research can be found at maestrocapitalresearch.com.

Please continue to stay safe and healthy.

Timing is everything

Last week we showed readers how investors would have fared had they followed the well-known Wall Street adage “Sell in May and Go Away” (for those who haven’t read it, click here). This week we have another relatively simple-to-execute strategy for you.

Many people have asked us over the years what funds they should invest in within their 401K or similar tax-advantaged retirement savings plans. Many employer-sponsored plans have a relatively limited number of investment choices available to select from. Furthermore, with diversification through index fund investing having been the financial advisor mantra for years (along with the standard 1-3% annual management fee to…well, support their sales efforts to score even more assets under management), investors get conveniently blended and watered-down funds that often don’t yield consistent returns nor protect them from periods of market volatility. There are basic strategies that may help the average investor outperform the market averages even with the most restrictive 401K programs.

Here’s one to consider (in absence of a catchy name, we’ll call this strategy the “Ultra Simple Moving Average Strategy”):

  • Switch to (buy) the S&P 500 index when the closing price is above the 264-day simple moving average (264 SMA) and the lowest price that day was 1% below the 16-day simple moving average (16 SMA).
  • Switch from (sell) the S&P 500 index to (buy) a placid fixed income bond fund (with a consistent 2+% annual return over the last 10 years) if the lowest price that day crossed below the 264-day simple moving average (264 SMA).
  • Switch from (sell) the S&P 500 index to (buy) the fixed income bond fund if the highest price that day was 8% (or more) above the 16-day simple moving average (16 SMA).

Here are the results:



By switching to the bond fund when the S&P 500 dips below the longer-term SMA, you avoid a significant part of market selloffs (which are often aggressive) and take profits when the S&P gets “toppy” (overbought). And with the overall greater returns, you also get significantly less drawdown (-19% vs -56%) and are out of the market (in bonds) 30% of the time.

If you have the option to invest in a leveraged, double (2X) long ETF (ProShares Ultra S&P 500, symbol: SSO) rather than an S&P 500 index fund or ETF (symbol: SPY), the total return increases from $534,700 (shown above) to a whopping $1,758,200 (not shown)! Your drawdown would then be closer to buy-and-hold (still only -39% vs -56%), but your return would be 229% higher!

Assuming you’re making regular contributions to your 401K, we also suggest that you try to modify the timing of your contributions to occur (ideally) when you are out of the S&P 500 and in the bond fund; however, this may be tricky if there’s an extended bullish period of time (as was the case 1997-1999, 2013-2014 and most of 2019).

Market volatility is likely here through the summer, the election cycle and will inevitably occur randomly for years to come. 5%, 10% and even 50% moves up and down are what traders (an increasing number of which are quantitative hedge funds) have become largely dependent on to drive big returns. For the average retail investor, there are alternatives to sloshing around in that great big turbulent sea while still achieving good returns. Both the “Sell in May and Go Away” strategy that we presented last week and the “Ultra Simple Moving Average Strategy” described here are both ways to get better returns with less drawdown.

Forte Strategy Update

Here’s a quick update of the Forte Strategy trading activities for the week. The oil and equity markets remained at elevated levels of volatility for the week which left these trading models inactive. However, the volatility levels are steadily declining and are approaching a level within the range for trading. If these markets continue to quiet down, a trade is possible as early as next week. We did execute one round-trip trade in the gold market which netted a small gain of 0.2% for the week which reduced the loss for May to 0.1%. Our full year net results so far equal a 1.3% loss compared to a 8.5% year-to-date loss for the S&P 500.

More details about our trading activity can be found by registering on the Collective2 website and searching for Forte Strategy. A running list of these email blogs and general information about Maestro Capital Research can be found at maestrocapitalresearch.com.

Market Update


  • The 200-day simple moving average (200 SMA) is still holding as resistance which the 20 and 50 SMAs resting below as support (bearish), however…
  • 61.8% Fibonacci retracement level now appears to be serving as support, so it’s possible that we see the S&P 500 run up to the 76.4% retracement level of 3100 (bullish).
  • Uptrend momentum continues to decline (note PFE) similar to what occurred from Dec to Feb (bearish).
  • The fifth Elliott wave appears to have extended to 2976 on Tues (bearish).


To our men and women in uniform, past, present and future, Maestro Capital Research would like to say “thank you” for your service and sacrifice.

Please continue to stay safe and healthy.

Should I Sell in May and Go Away?

Yes, the data clearly supports that it is prudent to sell long-term positions in May. We’ve spent years (decades, really) studying data and developing models that provide an edge in the markets. You may have heard that it’s impossible to beat the S&P 500 average in the long-run. While in most other endeavors in life, ambitious people rarely strive to be average – why should we hope that being average is somehow as good as it gets or even better than most professionals? This logic doesn’t make any sense to us. Year after year, we were encouraged to achieve grades higher than a “C” average starting in kindergarten through graduate school. Why settle now?

Here’s one straightforward example of how to beat the market averages, on average. When studying S&P 500 returns over the last 90 years, we see that the vast majority of the gains occurred during the six-month period from November through April and a much smaller portion of the gains occurred during the months of May through October. Even over the last 20 years, 85.2% of the gains happened November through April whereas only 14.8% occurred May through October.

The following summary shows the results if you were to have invested $100,000 at three different starting years: 1927, 1990 and 2000.


In all three scenarios, Sell-in-May-and-Go-Away (“SIMGA”) beat Buy & Hold (“B&H”), proving that beating the market averages was as simple as going long the S&P 500 during the months of November through April and then liquidating at the end of April. Furthermore, your risk exposure would be a fraction of the buy-and-holders – so you’d earn higher overall return with less risk.

Why is this? Market historians point to the farming cycle and more recently to vacation cycles. Traditionally, agriculture markets are relatively inactive during the summer months as the crops have been planted and are slowly growing in the fields. Then, after the Fall harvest, the activity rapidly increases as the crops are harvested, distributed, and converted to consumable products. In more modern times, the summer months slow down due to vacations and the school cycle. And, major financial centers (New York, Boston, London, Frankfurt, Tokyo, and Shanghai) are all based in cold Northern climates that thaw in May for a fairly short period of warm months. Instead of staring at a computer screen or locked in investment allocation meetings – key players are on the golf course, fishing, vacationing, etc. And even in several major economies, August is a vacation month with a high percentage of business activity halted.

For 2020, it seems like a unique case to support this sell-in-May view as we have record unemployment, unprecedented rapid deterioration of the economy, and a full-blown global pandemic underway. And as the media turns their attention to the election process, it’s unlikely to provide stability to the financial markets.

For disclosure, we don’t actually trade based solely on such simplistic models; nor does seasonality factor directly into our decisions. However, it’s likely that seasonality does influence the data that we process as outlined above. We hope you at least find this general observation interesting and maybe useful for some of your longer-term investment decisions.

Forte Strategy Update

The oil and equity markets remain volatile at a level 2 – 5 times the historical averages and, therefore, these trading models are inactive for now. The gold market volatility has fallen to a reasonable historic level so this model now restarted. We’ve traded 5 times this month so far for a net loss of 0.3% month-to-date.

More details about our trading activity can be found by registering on the Collective 2 website and searching for Forte Strategy. A running list of these email blogs and general information about Maestro Capital Research can be found at https://maestrocapitalresearch.com/.

Market Update


  • The standard five-wave Elliott Wave pattern held and a subsequent a-b-c pattern formed.
  • The 200-day simple moving average (200 SMA) has also held as resistance.
  • We’re now bouncing within the 50% and 61.8% Fibonacci retracement levels.
  • Uptrend momentum continues to decline (note PFE).
  • Volume ticked up during this past week’s bearish days.
  • If the 200 SMA holds over the next week or so, we will become increasingly concerned that we’ll see another large leg down (possibly below the March 23 intraday low of 2200)

Another observation we made over the last few days:


On May 3rd, we mentioned government intervention being the “wildcard” that may continue to prop up the markets (at least in the near term) with negative interest rates (NIRP) being the potential precedent-setting game changer that could put a quick end to this bear market. Although Fed Chairman Powell stated this week that the Federal Reserve would NOT resort to negative rates to counteract the coronavirus recession, the Fed Funds Futures market begs to differ. The yellow circle above shows where the March, April and May 2021 contract prices breached the all-important 100 level. Why is this important? We’ll avoid a long-winded explanation and get to the point: banks and fixed-income portfolio managers are now wagering that Powell WILL indeed be forced to resort to moving the fed funds target rate (which is the interbank overnight lending rate for commercial banks’ excess reserves) below zero within the next 10 months! This is a very bearish sign.

As always, thanks for your interest. Please stay safe and healthy.

Clouds continue to form

Starting this Friday May 15, this email blog will be distributed and posted weekly every Friday evening. Any given week, we’ll discuss a variety of topics such as simple-to-apply strategies, updates on our Forte Strategy and new research developments. We’ll end each email blog with a brief Forte performance and market update for the week. So until Friday, here’s our latest technical take on the S&P 500.

Market Update

In last week’s blog (“So where is the market headed?”), we provided technical observations on the daily S&P 500 chart suggesting that the market is more likely heading down than up. Here’s an update:


  • Despite last week’s continued retracement run, the SMA 200 resistance level is still holding (2992).
  • The high of the fifth of five Elliott Waves has also not been breached (2965).
  • Friday’s close stopped slightly above 61.8% Fibonacci retracement level (2923).
  • Volume continues to decline implying a steady decrease in buyers.
  • Momentum oscillators, such as the Polarized Fractal Efficiency (PFE) trend strength indicator (displayed in the chart above), is diverging.
  • We’re convinced that these final bullish surges are being largely driven by traders covering short positions (short squeeze). This could continue for another several days or even weeks…which could make the next leg down that much more sudden and aggressive.

At MCR, we monitor several commonly-tracked technical indicators which collectively increase the odds of identifying potential key trend reversals. Similar to how meteorology works for weather forecasting, the predictive accuracy of technical analysis (or “chartology”) is not 100%; however, it has consistently proven to be effective for decades (even centuries!). Just keep in mind that support and resistance levels could be breached, rallies may continue longer than expected and forecasts may change. We’ll continue to provide updates every Friday – stay safe and healthy!

So where is the market headed?

Over two years ago, we posted a write-up on our blog titled “The Selloff” which provided several bullish reasons why the pullback in the S&P 500, at that particular time, appeared to be “merely a healthy bull market correction”. Just two days before that posting date (on Feb 9 2018), the S&P 500 had hit an intraday low of 2551, which represented a 13.7% pullback from the all-time high of 2899 just nine days earlier. From that mid-Feb low, the S&P 500 rallied 32.8% over the next two years, reaching yet another new all-time high of 3386 on Feb 20 2020.

We were bullish back in 2018; in 2020, unfortunately that is no longer the case. To say that we are witnessing unprecedented times is obviously an understatement. Given we’re not epidemiologists or fortune tellers, we can only speak to past and present market conditions and provide an outlook on what the future may hold from a technical perspective…and from our vantage point, it’s not looking good.

The following daily chart of the E-mini S&P 500 futures contract provides several technical observations worth noting:


  • The intraday high of 2965 came very close to the 200-day simple moving average (SMA 200) which is a key resistance level.
  • A fifth of five waves of an Elliott Wave pattern appears to have completed.
  • A common Fibonacci retracement level of 61.8% was met (looking back at the last several recessions, 50%, 61%, and even 76% retracements were common prior to lower lows).
  • Volume has been declining since the retracement rally began on Mar 24.
  • The volatility index (“the VIX” or “fear index”, not shown) has remained elevated at or near 40 since early March.

A few other random facts worth noting:

  • Every market decline since the Great Depression that was greater than 30% took a minimum of one year from peak to trough (the S&P 500 has declined 36% and we’re only a little over two months in).
  • Warren Buffett recently sold off his entire stake in the airline sector, warning that “the world has changed”.
  • Travel, Tourism & Hospitality represented 10.4% of global GDP in 2019 (statista.com).
  • Over 30 million Americans have filed for unemployment benefits over the last six weeks; that’s around 18% of the working population.

So with all of these negative factors weighing heavily against a V-shaped economic recovery, there is a wildcard: government intervention. The US government has waged all-out war against deflation (an even greater evil than inflation), launching a $2 trillion consumer stimulus package, cutting the Fed Funds rate to near zero (issuing forward guidance that rates will stay low), reinstating QE, providing low interest lending to securities firms and backstopping money market mutual funds to name a few. Of all the weapons and tactics that Fed Chairman Powell has at his disposal, the one that could have a significant impact is NIRP or “negative interest rate policy” (basically charging savers a penalty). With debt-fueled GDP growth the increasingly popular path to global economic prosperity, governments are essentially forced to stimulate spending through, well, more deficit spending. And what better way to make consumers spend than to penalize them for not spending. But is NIRP even sustainable? Or even legal or ethical? We’re becoming increasingly convinced that NIRP, regardless of how inherently wrong it may be, is where the market bottom may be found.

Now, with all of that said, MCR continues to focus research efforts on trend-based technical and mechanical strategies and systems. So, regardless of whatever direction the market decides to take…up, down or sideways…our goal is to profit from it.

Stay safe and healthy.