Wednesday, September 08, 2010

VXX Trading Model

VXX had been an outstanding trend model.  Despite my protestations that this market should come crashing down at any minute, the VXX trend model has been spot on in managing the market's rally.  Below is a chart of VXX with its trend model's signals for the past 10 months:

VXX Daily Trend Model

VXX Daily Trend Model Trading Pro Forma

At its highs in early 2009, VXX traded at 118.  That suggests that if and when the market revists the March, 2009 lows, this $20 stock will rise over five-fold.  There is no way it does that without taking its trend model along for the ride.

Past performance is not a guarantee of future results.


Anonymous said...

if you are a long only investor on VXX, your return will be a lot less
on the buy signals, you get a return of -9, +30, -5, -7, so you get a return of 9% instead of 97%

A said...

Through most of the period under review, the market has been up and VXX down, so of course the SHORT signals have generally outperformed the LONG signals. "Trend Following" doesn't mean follow only some of the trends.

Anonymous said...

On another note, does NNVC look good because of the upcoming September Conference?
or is this the nature of a trading stock, goes up, goes down?

Anonymous said...

Allan, I realize VXX has mostly been in downtrend, but I think most of the investor out there are long only

Anonymous said...

If it were 9% that in itself is pretty nice. However the chart gives a best case scenario where you have bought at the bottom and sold at the top. In reality it might be impossible because the buy/sell signal often happens overnight and in the morning at the first opportunity to buy, the price is often much higher/lower, to our disadvantage. The short side still looks pretty impressive though.

Anonymous said...

Are there any ETFs to play the VXX long and short? Any 2X or 3X ETFs?

Anonymous said...

Hey guys, read a good article about playing VXX:

This may tell you that only trading and eventually following Allan's model might be profitable.

Keeping it long for prolonged time might be disastrous, as charts shows.
Play in VXX is suitable for very experienced traders, similar as FAZ, TZA, etc. If you catch trend properly then you are a winner.


Digger said...

Being short the VXX or long the XXV profits from the underlying premium erosion in the VIX futures. See

In other words even if the actual VIX index did not move at all you would still make money in those positions. The VXX has a builtin downward bias and conversely the XXV has a builtin upward bias.

I have been pleased being long the XXV. However it is constructed somewhat differently from the VXX and also has a different issuer and will tend to underperform roughly 25%. It was issued at a price of $20 keyed to a VIX index of 27.

Personally I am hesitant to short the VXX because I remember all too well the 10+ point gap in the VIX when the markets reopened after Sept. 11, 2001.

I would also avoid longs in all leveraged ETFs because they have a builtin downward bias and will all go eventually to zero which is why they keep doing reverse spilits on them. Obviously the longer you hold them long the more that bias works against you. Some folks short both the leveraged long and short ETFs for the same underlying to take advantage of that bias but I haven't worked out the correct sizing to do that yet.

Later, Digger
Counter Insurgency, Deficit Terrorist Unit

Anonymous said...

That is some really good information!

Appreciate that Digger!

Just, me

Digger said...

Interesting article on the VIX from Tom McClellan today:

Tom may be correct but I believe in forecasting for fun but trading for real, although I do enjoy hearing others' research.

Also in the interest of accuracy: If the VIX futures ever started trading at a discount instead of a premium to the underlying VIX then the biases on the VXX, VXZ and XXV would reverse. I doubt that will happen but I have learned to never say never.

Anonymous said...

" ETFs because they have a built in downward bias" surely if that were true everyone would be short. Seems too easy.

Digger said...

That statement was not based on opinion, just mathematics. One of the better articles on the subject:

Obviously, if your holding period is very short the underlying bias won't hurt much but I just can't see the point of bothering if your broker like many charges 2x or 3x margin to trade the silly things as your return on margin would be better with the unleveraged funds. Wall Street is very good at inventing instruments for suckers.

Better to learn to trade futures if you want more leverage. Interactive Brokers (highly recommended - pay as little as 14cents total to trade 200 shares of equities if you are providing liquidity) allows you to do that in IRA accounts.

Contrary to popular opinion futures are only more volatile than stocks if you use the increased available margin but no one forces you to do that. You can margin at 50% and have equivalent volatility to a Regulation T margin account.

Anonymous said...

Allan, you have been missing in posting for a few days, what is up ???

Anonymous said...

IF the VXX price is calculated off of the two nearby futures contracts why is it trading at a discount to those two contracts?

Digger said...


It is trading at a discount because of the CUMULATIVE effect of the previously noted downward bias. At some point they will probably have to reverse split it.

If you constructed what is known as a backadjusted continuous contract chart of the VIX futures it would look very similar to the VXX.
Let's say you started a new CC chart and the September VIX contract closed at 25 on last trading day (or you could use the cash settlment price set on the open the next day if you were holding into settlement). The October contract say is trading at 28 on that day but on a continous chart you would start it at 25 - the point the previous one stopped at. If the October then dropped 5 points the daily October chart would show a price of 23 but the continous contract would show a price of 20. I believe the VXX uses a weighting of the front two months- you would have to look it up.

Hope that helps. You can probably search "continous futures charts" and find some examples. Some charting vendors offer the capability of constructing continous futures charts in order to make backtesting strategies easier. There are several methods of splicing them.

You get a similar effect but upward right now, in among others, the Aussie dollar and Treasury Bond futures continuous charts right now because the nearby contract is trading higher than the second month contract so your continous chart would show a price higher than it ever actually traded at.

That is why is misleading to draw inferences from where the high point is on a leveraged ETF chart that has reverse split because it never actually traded there.