There’s no denying it—we had a rough month in May. Under the circumstances, our 8.48% Model Portfolio loss was well within our tolerance for a one-month drawdown, and a vast improvement over prior losses under similar conditions before we updated our risk-management rules—but, as long-time members know, we never take a loss lightly.
Nevertheless, at this point I don’t see any reason to modify our strategy. Our track record, based on a combination of real results and backtesting, indicates that we’re likely to do best by standing by our current, tested rules. The worst mistake at this juncture would be to abandon the strategy on an outlier drawdown, and thereby eliminate the possibility of recovering this month’s loss in future cycles.
At the risk of sounding like a broken record, I’ll repeat our mantra of consistency and discipline. Given a strategy with proven long-term outperformance, the worst time to abandon it is after a loss. Returns revert to the mean just like share prices and volatility; checking out now gives you zero chance of taking advantage of that mean reversion.
All the above said, let’s get to our status, starting with the May returns:
May Performance Review
The net return from our May SPY trades was –8.48%—disappointing, but far from disastrous. We’re still down only 6.7% for the quarter, and our track record suggests that we could easily make that up, and more, in the June cycle.
Regarding our Supplemental Trades, the news is significantly worse—a 29.57% Model Portfolio loss. We entered the energy sector on the thesis that periods of volatility are usually followed by periods of calm—yet the volatility continued throughout the May options cycle. I’m working on modifications to our volatility-based stop trigger, but for now, we’re suspending Supplemental Trades until we understand what went wrong this month.
Status of Open Positions
Per our mean-reversion-of-returns thesis, our June portfolio is faring well so far. In the last 10 minutes of trading today, our unrealized loss is a scant 1.7% of total capital at risk, and the software models we use project a 53% probability of profit without any additional trades. And, we still have half of our capital in reserve for additional calendar trades and/or hedges.
Our risk profile as of about 3:53pm Eastern today is shown below:
Our current projected risk-management price thresholds are at about SPY 130.50 and 134.60.
A summary of our open positions is available on the Portfolio page.