Is the XIV walking on a tight rope? Well.... This hasn't happened yet!

Is the XIV walking on a tight rope? Well.... This hasn't happened yet!

There's been a notable rise in popularity of this ETN that shorts volatility, over the last few years. When I started studying this product in 2014, I recall it only having about 3,000 or so followers on StockTwits. Today, that number has more than doubled to about 8,000 followers. In comparison, the VXX ETN that goes long volatility, has about 12,000 followers on StockTwits. So what does this mean? It simply means that more and more retail traders/investors are starting to gain interest in XIV. This is mainly driven by the remarkable returns this product has seen in a short period of time. Since the election on 11/4/16, the XIV is up more than 150%! 5 year returns are over +500%! 

So, after all these impressive returns, is XIV walking on a tight rope? Lets take a look at some interesting data points:

The first data point that makes my antennas go up, is that the VIX has entered a period a seasonal strength. This means that based off seasonality, XIV has entered a period of weakness. See chart below:

The period of seasonal strength in the VIX, tends to last from July until mid October

The second data point is that the XIV is on a record breaking winning streak. XIV has finished higher for a record 8 months in a row. This has never happened before in this ETN's history! Can this streak continue? Sure, but the longer it goes, the bigger the drop will be when this streak ends.

The third and most remarkable data point is that the XIV hasn't seen a -25% drawdown this whole year. This is incredible given the fact that there's been a -25% drawdown every single full year since 2011! History also shows that there's a better than average chance, the XIV sees a -40% drawdown in any given year. See the data below:

% of times the XIV corrects a certain amount in any given year. Excludes 2010 and 2017, as they haven't been a full trading year

So is the XIV walking on a tight rope? My work tells me yes, but as we all know, this appreciation could last longer than anyone thinks....

Thank you for reading!

 

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August seasonality

August seasonality

History! XIV etn up 7 months in a row!

History! XIV etn up 7 months in a row!