Post 15: Viewing Risk by Grouping SPY Daily Changes

Early in this blog series a physicist asked why always holding SPY, called Buy&Hold, wasn’t a better strategy than trading at noon and selling at 4pm, called SPY_PM. My too quick response focused on holding time and risk. I found the model holds SPY only 2% of the time and then concluded, incorrectly, that it's only one fiftieth as risky. But then an ex-CEO mentioned that Time was the wrong variable - one hour on Saturday evening when all markets are closed shouldn't be equated with one hour on Wednesday afternoon when the Fed is making announcements - so Post 8 compared volatility to compare periods.

Using volatility Post 8 found SPY_PM is still less risky than Buy&Hold. Given the recent volatility and market drop this post extends that analysis. It compares Buy&Hold losses with SPY_PM losses looking at both holding time and volatility. Column 2 and 3 groups the number and amount of daily losses into the categories of column 1. This is the physicists strategy and also the strategy recommended by Warren Buffet for his wife. Columns 4 and 5  categorizes all changes for every afternoon, that is, SPY changes between noon and 4pm. Columns  6 and 7 shows afternoons selected by SPY_PM. Finally, columns 8 and 9 further restricts SPY_PM afternoons to only those afternoons when VIX at noon was less than 20.

Over the last 7 years the physicists strategy (col 2 and 3) clearly wins returning 104% but not without some pain. Ten days with loses between 3 and 5% and 165 days with losses between 1 and 3%. With SPY_PM (col 6 and 7) not one day had a loss greater than 2% and only 8 days had losses between 1 and 2%. Of course this comes with lower return of 42.3%.

SPY_PM's power becomes quite clear by comparing with trading every afternoon (col 4 and 5). Imagine on 1701 days buying SPY at noon and selling MOC. (Trading costs would be just 3-4% but let's ignore these.)  This strategy returns 37%. SPY_PM, however, trades on only 493 days yet returns 42%!

The final two columns are a response to the last week of volatility. As mentioned in earlier posts SPY_PM is now volatility adjusted so its triggers get wider when VIX is low. At the other extreme what if one didn't trade on high VIX days? The result isn't conclusive. Yes instead of 8 days with a 1-2% loss there are only 5 so less risk but net return drops from 42% to 33%. As always thoughts on this comparison and other ideas in here will be appreciated.

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