What I’m Reading This Weekend

Lot’s of great reading this weekend folks!

Has Midas Lost His Touch? Buffett Questions Performance as S&P 500 Beats Berkshire.

Day of Month Seasonality for March

Trend Following Wizards – beginning of 2013

Predictive Power of Put-Call Ratios

MACD – Test Results

Flexible Asset Allocation

You can read some of these articles, and more, over at The Whole Street: Quants.

The Fidelity Sector Rotational System finished up 0.9% for February. For 2013, the system has gained 4.4%.

$SPY finished up 0.6% for March. For 2013, $SPY has gained 4.1%.

The system is currently long FSAIX (Air Transportation) FSFRX (Transportation) and FSLBX (Brokerage and Investment Management).

The equity curve, starting 2012, is below.

Top pane is $SPY.

Middle pane is the equity curve. Green areas show when the system was in cash.

The bottom pane shows the drawdowns.

Been driving for hours today to check out a possible new addition…

We decided she is a keeper and are driving back up on Saturday to pick her up and take her home. Faithful blog readers will recall we lost our family dog of 16 years almost a year ago.  We are unbelievably excited and can’t wait to bring her home.

I don’t think this cute little correction is quite done yet. If it is done and we soon make new highs, these high tight flags may soar.

The Fidelity Sector Funds are clustering, with all of the transport related funds rising into the top 3. This could be bad for the system, since it must hold funds for 30 days before selling.

Currently, 2/3rds of the funds the system is holding are transport related: FSAIX (Air Transportation) and FSFRX (Transportation). The 3rd fund it is holding is FSLBX (Brokerage and Investment Management).

The top 5 Fidelity Select Funds, as of tonight:

1. FSAIX (Air Transportation)
2. FSFRX (Transportation)
3. FSAVX (Automotive)
4. FSLBX (Brokerage and Investment Management)
5. FSLEX (Environment and Alternative Energy)

And the bonus sector fund, especially for Le Fly since he likes the space…in 7th place behind Industrials, is FSHOX (Construction and Housing).

I’m expecting to see some sector rotation, and soon…but these trends can persist longer than we expect.

Today the $VIX, or CBOE Volatility Index (aka the fear index) posted a one day gain of 34%. Let’s look at the ramifications of this rare event.

Using $VIX history going back to 1990:

• There are only 19 times in the past 23 years that $VIX posted a 1 day gain greater than 29.99%
• The largest 1 day $VIX gain was 64.22% on February 27, 2007.
• $VIX posted 1 day gains of greater than 29.99% on 4 occasions in 2011, the most of any year
• In 2012, $VIX never posted a 1 day gain greater than 29.99%

What’s Happened Over the Next 100 Days?

We will buy $VIX or $SPY at the close after $VIX posts a 1 day gain greater than 29.99% No commissions or slippage included.

• There were 19 occurrences of the setup on $VIX with 11 trades held the full 100 days.
• There were 14 trades made on $SPY with 9 trades held the full 1o0 days.
• The Left Axis has $SPY average profit or loss.
• The Right Axis shows $VIX average gain or loss.

There are not many samples, so I am cautious of drawing strong conclusions. However, it is safe to say that this setup is not bullish. I like to think about the effect of a volatility explosion being similar to the effect of throwing a large rock into a still pond. As the waves travel outward from the impact, they get smaller and smaller over time and distance. Although the immediate effect is over fairly quickly, the waves take some time to diminish. Indeed, we see that relationship expressed rather elegantly in the graph above.

Previous Posts on Volatility Explosions:

$VIX Makes Huge Gains: What Happens Next?

More Research on Large $VIX One Day Gains

Many new HTFs have developed. I was surprised to see them after the little pullback we had.

Solar is still holding strong, making two contributions to tonight’s list.