Volatility Second Wave

The market volatility increased significantly this week with the large sell-off on Thursday of 5.9% for the S&P 500. We thought it would be an appropriate time to provide an update on our prior historic market volatility analysis for the two events of the same scale as the COVID19 pandemic – the Black Monday crash of 1987 and the 2008 financial crisis. Recall that we focused our analysis on events that had a volatility spike that is 7X greater than the total average volatility of the Dow Jones 30 for a 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 has been updated to show the data for the past two weeks. It’s interesting that all of the volatility levels peaked at about the same time 37 days after numbers elevated 10% above the historical average (this is an arbitrary cut-off we used to mark the beginning and end of the lines and definition of the volatility event). And now the lines are converging to about the same level 90 days into the volatility event. You can also see that the COVID19 green line had the lowest level of volatility for an extended period 65 -85 days after the start of the cycle but is now in-line with the prior two events. Both the 1987 Black Monday and Financial Crisis had at least two follow-up cycles of minor volatility spikes between 60 – 120 days into the event. This appears to now be underway for the market reaction to the COVID19 pandemic.


Here’s an excerpt from our blog email a couple of weeks ago as the market volatility was slowly increasing: “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 down-leg sell-off in the market…”. The Dow Jones 30 graph has been updated for the week showing the current sell-off underway.


Forte Strategy Update

The equity markets remained at elevated levels of volatility for the week which left these trading models inactive. We executed two trades in gold which were essentially break-even. We completed our R&D work and started trading TVIX which is a high volume 2X leveraged ETF that tracks the S&P 500 VIX short-term futures index. This trade, which is still active, was a gain of 1.1% for the week. Our full-year net results so far equal a 1.1% loss compared to a 4.8% year-to-date loss for the S&P 500. Our YTD maximum drawdown is 9.5% versus 33.9% for the SP500.

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.

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