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The BTFD Strategy Has Never Worked Better (But Beware)

Tyler Durden's picture


There is a mathematical term used to describe a time series' propensity to mean-revert or not. Autocorrelation measures the tendency for today's price direction to be in the same direction as yesterday's. In a period of negative autocorrelation (such as today) when the market sells off one day it is much more likely to rebound the next. As Artemis Capital's Chris Cole notes, the current level of negative auto-correlation (often associated with positive for 'buy-the-dip' strategies in an upward trending market) has never been higher. Mean reversion and negative autocorrelations are one reason why many pure 'portfolio insurance' strategies are struggling with losses. If you are constantly shorting volatility this trend toward powerful mean reversion is your best friend. However, empirically, this high mean reversion is unsustainable.

Via Artemis Capital,

Today, mean reversion of daily volatility returns is at the highest average levels in the history of modern derivatives markets. Autocorrelations of daily returns measure the propensity for today’s price direction to be in the same direction as tomorrows. For example in a period of negative autocorrelation (such as today) when the market sells off one day it is much more likely to rebound the next. An environment of negative autocorrelation is often associated with positive performance for “buy the dip” strategies in an upwardly trending market (correlations measure direction but not trend).





In April we experienced some of the highest levels of daily mean reversion for volatility in history. The chart at the top shows the negative autocorrelations of 3-month rolling VIX index returns (please note y-axis has been reversed to show rising levels of mean reversion or negative autocorrelation). The second chart tracks mean reversion regimes measured over a longer 12-month lagged period demonstrating the most extreme autocorrelations since just prior to the crash in 2008 (but not the highest ever). Mean reversion and negative autocorrelations are one reason why many pure ‘portfolio insurance’ strategies are struggling with losses. If you are constantly shorting volatility this trend toward powerful mean reversion is your best friend.


High Mean Reversion is Unsustainable. Historically when autocorrelations in daily volatility drop below -0.30 the VIX index has closed higher over the next month 76% of the time with an average gain of 19.11% (still putting us at a mild 16 level on the VIX from today). The last peak in mean reversion occurred in early 2008 just prior to the onset of the financial crisis. This is not meant to imply that I expect a great crash but I do think it gives a powerful technical signal that we are long overdue for some kind of meaningful pullback in equities (even if that is just 5-10%).


The phenomenon of increasing autocorrelations is often seen in stock market crashes whereby one bad day is likely to be followed by another bad day. We saw rising autocorrelations during periods of financial contagion including 1987 Black Monday, the 1998 Russian Default and LTCM crash, and the 2008 meltdown.


The potential for mean reversion regimes to ‘shift’ is driven by increasing leverage and interconnectedness in the system. It’s hard to predict when these shifts occur!  When they do periods of high autocorrelations can be very damaging for equity portfolios but good for the Artemis Vega Fund LP.


In this environment fading fear and buying equity on every dip has made money. This cannot continue forever and presents a powerful asymmetric opportunity. At the same time it is dangerous for any long volatility player to underestimate the extent to which these cycles will persist. Eventually the rebuild of leverage in the system will provide an opportunity when the mean reversion dynamic breaks.




The fact that NYSE Margin Debt has been moving in lock-step with negative autocorrelations and volatility is not a coincidence.

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Fri, 05/10/2013 - 15:08 | 3549315 HelluvaEngineer
HelluvaEngineer's picture

The correlation will inevitably break down.  Any year now...

Fri, 05/10/2013 - 15:16 | 3549338 TrustWho
TrustWho's picture

Perfect, made me smile.

Fri, 05/10/2013 - 15:55 | 3549455 ACP
ACP's picture

Love that 345 stop bang up stop run that IWM didn't follow. Put/call super low.

Fri, 05/10/2013 - 16:45 | 3549550 Kirk2NCC1701
Kirk2NCC1701's picture


Fri, 05/10/2013 - 16:54 | 3549623 ACP
ACP's picture


Fri, 05/10/2013 - 15:20 | 3549354 bank guy in Brussels
bank guy in Brussels's picture


« Just buy the fucking dip and you will make money too ! »

From 2010, a ZeroHedge all-time favourite ... Lots of the newer people have maybe not seen it, 3 minutes 33 seconds of immortal animated cartoon financial crisis humour



Fri, 05/10/2013 - 16:45 | 3549598 Kirk2NCC1701
Kirk2NCC1701's picture

LOL, fantastic!  They said the same thing last Fall, when everyone was front-running the Fed, and PM prices were going up:  "Just BTFD, you fucking idiot!"

I recall people saying "Gold has no bubble!  It's a fiat currency symptom."

Now ther're saying: "It was not manipulated Up by us goldbugs.  It was only manipulated Down by TPTB."  / Of course rich goldbugs would neeever buy low and sell high to poor goldbugs.  Just BTFD!  /s

Regardless, now there's no money left for poor goldbugs to... "just BTFD!"  The poor gold bugs got sheared and double-dipped (by the rich goldbugs).  Baaah.

Fri, 05/10/2013 - 15:23 | 3549365 debtor of last ...
debtor of last resort's picture

On a long enough timeline...

Fri, 05/10/2013 - 15:12 | 3549328 TrustWho
TrustWho's picture

Daddy Bernanke risk management program works well, no? 

Fri, 05/10/2013 - 15:17 | 3549337 DoChenRollingBearing
DoChenRollingBearing's picture

I like math a lot, but this article is going to need another read or two before I get it all.  Time series and autocorrelation are complex topics, and I applaud Tyler for bringing in articles on topics of interest to the pros and statisticians who are here.  I look forward to reading the comments as well.

Fri, 05/10/2013 - 15:20 | 3549351 Diogenes
Diogenes's picture

I look forward to you explaining it in baby talk. It looks like bullshit to me (the market will keep going up until it goes down unless it stays the same in 10,000 words or less)

Fri, 05/10/2013 - 15:33 | 3549373 DoChenRollingBearing
DoChenRollingBearing's picture

Yeah, I wish I could explain this in baby talk.  I had some training in time series and autocorrelation, yet this still is hard slogging for me.  Not being up on the VIX will slow me down as well.

Could be re bullshit.  But, I have found that "letting the numbers do the talking" sometimes beats  the "experts" in a field (recent books by Nate Silver (The Signal and the Noise) and Ian Ayres (Super Crunchers) explain these notions better than I can).

Fri, 05/10/2013 - 15:20 | 3549355 HelluvaEngineer
HelluvaEngineer's picture

Here's a brief instructional video of the theory in action.


Fri, 05/10/2013 - 15:31 | 3549382 DoChenRollingBearing
DoChenRollingBearing's picture

Galloping Gertie!  Harmonics, bitchez!

Fri, 05/10/2013 - 16:51 | 3549608 Kirk2NCC1701
Kirk2NCC1701's picture

Then you probably know why Canadian engineers wear an iron ring:  To commemorate the engineering fuck-up from the bridge that collapsed.  Iron for the ring was from the failed bridge.

By analogy, bankers and brokers should be made to wear brass rings through their lips or nose.  Fucking liars & crooks!

Fri, 05/10/2013 - 15:16 | 3549339 DavidC
DavidC's picture

Well, I've been selling into every rally over the last year and continue to get stopped out...more fool me maybe.


Fri, 05/10/2013 - 15:18 | 3549345 TrustWho
TrustWho's picture

Today is a perfect example of a step function and past period correlation!

Fri, 05/10/2013 - 15:24 | 3549368 TrustWho
TrustWho's picture

Either the Fed is doing this or people who hear Bernanke's whispers, because this takes confidence.

"A" buys and sells at higher price to "B". "B" sells at higher price to "C". "C" sells at higher price to "A". "A" sells at higher price to "B" and so forth and so on.... the liquidity to make this work is awesome

Fri, 05/10/2013 - 15:19 | 3549346 Trampy
Trampy's picture

Nothing lasts forever!

Fri, 05/10/2013 - 15:21 | 3549358 css1971
css1971's picture

Waiting, waiting, waiting...

This is Taleb's strategy though, no? I'm not sure it isn't simply better to be long bonds or cash till TSHTF.


Fri, 05/10/2013 - 15:22 | 3549363 Flaming Ferrari
Flaming Ferrari's picture

All jokes aside. That little video we all laughed at was the best investment advice you could have had back then. Lever up, BTFD.


Fri, 05/10/2013 - 15:50 | 3549435 axe
axe's picture

Where can I find the original Artemis article.

Fri, 05/10/2013 - 16:10 | 3549491 fuu
fuu's picture

Is it ok if I discriminate against bankers?

Fri, 05/10/2013 - 17:06 | 3549652 W T F II
W T F II's picture

The corelation of auto-correlation to "Flash Crash Certainty" is around 1.000. It is at least 1.00, in any event...

Fri, 05/10/2013 - 17:22 | 3549712 q99x2
q99x2's picture

Let me hear you say, "Uncle." Chicken Little this and Chicken Little that: Which do you think was easier to take over free markets or Washington D.C.? Now that they control it why worry its their money but they are giving you a free ride. There will have to be something other than economics to stop the stock markets from rising. 

Fri, 05/10/2013 - 17:30 | 3549738 Ted K
Ted K's picture

Mr. Durden is there any way you can make these graphs show that gold is headed higher??? I feel like you're not keeping your focus on keeping the gold propoganda up.  Oh no!! OH no!!! The coins are going!!! The coins are going!! Shortage and it's all Corzine's fault!!! Corzine is using pagan magic elixir to "manipulate" gold prices down. We're all going to die!!! I'm running to get some Spam meat now!!!!

Sat, 05/11/2013 - 11:31 | 3551354 pfairley
pfairley's picture

Please specify eyeball adjustment so I can read the first 2 charts. Also I am not sure this author is writing to really communicate to anyone and be understood. Then we might not only be unimpressed but disagree and criticize and really hurt his feelings.   

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