EVALS Q2 2009 Update: +18.47%

The second quarter of 2009 saw EVALS gain 18.47%, beating the 15.22% advance in the benchmark S&P 500 index by 3.24% (including rounding errors.)

Throughout April, May and most of June, EVALS had strong bullish positions in emerging markets, metals, mining and energy services. As a combination hedge plus volatility play, EVALS also was long a covered call ETF for the majority of the quarter and one of the VIX futures ETFs for the latter half of the quarter. This combination consistently outperformed the SPX during April, May and the first half of June.

As commodities prices topped and emerging markets began to see some selling pressure, the portfolio exited all these positions and switched to an aggressive short position about a week before the end of the quarter. By the end of June, the short bias was responsible for a 5.78% deficit to the SPX for the month, as stocks surged to a lower high by the end of the month.

With the benefit of 20-20 hindsight, it now appears that these short positions (which have been exceptional performers in the first two weeks of the new quarter) were initiated about a week too early – much as the long positions from November were put on about a week before the final large VIX spike. This leads to an interesting sidebar about market timing. Undoubtedly, the majority of trading systems employ some sort of trend following strategy. They wait for a trend to develop and meet certain criteria for trend strength before new positions are added. Volatility systems, however, are more attuned to identifying changes in the prevailing trend. These signals are not infallible, of course, but I will be glad to be a week early here and there if it means catching quite a few new trends right at the beginning.

The graphic below shows the monthly performance for EVALS and the SPX since the August 21, 2008 inception. For the first half of 2009, EVALS is up 27.70%, a full 25.92% better than the SPX, which managed a 1.78% gain through June 30^th. Since the portfolio’s inception, EVALS has a loss of 14.71%, which is 12.10% better than the 26.81% loss in the SPX during the same period.

Going forward, I expect to be aggressive and opportunistic, looking to capitalize on what is likely to be much smaller bullish and bearish moves in the market during the second half of the year.

Finally, to reiterate what I have said in the past:

EVALS is a very aggressive trading approach that does not mind striking out from time to time, provided the home runs provide more than adequate compensation for the risks. For the first 10+ months, this strategy has been successful in aggregate, but not without some bumps along the way.