Last week I mentioned the consequences of a low VIX value on the ATR and the resultant problems that situation presented for traders. Over the weekend I also noted that the Clueless One posted some updates to a few of the IWM and Qs Dirty Dozen portfolio of TradeStation systems that I posted a while back. I don’t know if that’s a good or a bad indication of Clueless’s trading performance . . that he’s had to resort to dredging up my old studies, but I know him to be an astute trader, smarter than the average bear, and almost as risk adverse in his trading as I am so I suspect he’s just spring boarding off my humble little market probings.
Among other things, Clueless notes the flattening of the equity curve of many of the systems. Now I actually trade a few of these systems to supplement my daytrading so I’m pretty much up to speed on how’s they’re performing and I’ve noted this flattening myself so I decided to examine the performance metrics a little closer.
Above is the composite equity curve of the top 5 Qs Dirty Dozen Systems going back 16 months. The chart reflects the average performance for each of the systems.
And here’s the surprise: the systems are actually chugging along with pretty much the same ratio of winning/losing trades as 1 year ago BUT the net return per trade has steadily declined as the VIX has fallen, followed by the ATRs.
To use an analogy. . there’s only so much juice you can squeeze out of a dried up orange, and it’s getting tougher and tougher to generate per trade returns similar to those of a year ago from the same orange (Qs or IWM).
This drying up is also painfully evident in the options market. Up until just month month ago it was pretty much a no-brainer rolling out ITM GE covered calls to generate 2-3% a month. That’s just a distant memory as of this expiration, with the April 17s yielding 1-1.5%. Of course, you could sell the ATM 18s for 3%, but that’s a little riskier situation IMHO. Again, the point is that for the last year you could have sold the slightly ITM GE calls for a pretty much risk free 2-3% per month . . a world away from the piddling 1% money market returns and 1.5% APR CDs, if you can find them.
From a practical standpoint I’m finding it harder and harder to identify attractive longer term trading situations. Most of the majors are still sitting at 6 month overhead resistance levels as the low volume melt up continues and, per the comments above, low volatility has significantly reduced the hedging edge previously offered by using covered calls or side spreads. Too risky to go long, to early to go short IMHO.
Time for Plan B.