XIV did suffer a bit of a decline so the STOP that fired yesterday did catch the change of pulse. ]]>

Using the z-score algorithm that drives the Market Rewind/

This means that although the skew may continue for some time, the model will exit both sides of the position at 13 days. At the same time, if the skew collapses prior to the 13 day time stop then the positions will be closed automatically.

The value of the time skew may change over time so to capture any potential volatility drift the N-Days value is recalculated each month. **MO2′s **SPY/UPRO** **trade signals are vested 76% of the time. Trade results reflect returns of the pair over a 7 month period in order to align with M3 model performance metrics.

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Monday’s following OPEX are frequently negative as the premium pump from last weeks expiration translate into distribution selling, but that forecast is more anecdotal than a statistical probability.

For now we in a holding pattern and looking for a range breakout one way or the other.

I’ll be on the road Monday-Wednesday next week so postings may be limited although the SPY/UPRO study will be posted Monday.

There will be NO 12:45 M3 updates Monday-Wednesday.

M3 is going through some testing at a large hedge fund next week and any new refinements will be incorporated into the model before being formally offered for subscription. ]]>

We got the expected drop and pop and and we’re back in the drop mode for the weekend. After an impressive rally at the open XIV has crumbled once again and is down almost 5% into the close.

You can check out the new M3 site http://www.mosaicm3.com/ which will go operational mid August.

More details will be posted here this weekend. There will be no posts Monday-Wednesday next week. ]]>

The good news is that it is well-accepted that volatility is highly predictable in financial markets. Perhaps one of the best measures of volatility is implied volatility reflected by market participants in the VIX. A simple idea would be to use the VIX to adjust daily returns in order to create a trend-following strategy that is more robust to non-constant variance. The method as follows is very simple:

1) compute daily returns or log returns for the S&P500 time series

2) divide each daily return by the VIX level on the same day

3) take a lag of your choosing and compute the simple average–say 200-days in this example

Strategy: Go LONG when the VIX-Adjusted Momentum>0, Go to cash if sma, cash if not) and a 200-day traditional momentum strategy (go long when the ROC>0, cash if not).

here is a graph comparing the strategies:

Clearly the VIX-ajusted momentum is superior to the traditional trend-following strategies using this set of parameters. This concept can be extended in several different ways- for example, one could instead use historical volatility, or the difference between historical and implied in other creative ways. Hopefully readers will be inspired to take a fresh look at improving upon a simple and traditional strategy.

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