Hi YXI friends,
US stock futures are climbing after Trump extended a ceasefire with Iran in the last minute. The ceasefire renewal is evidence that Trump doesn’t want to further escalate. The market could now reduce the immediate tail risk of the US-Iran conflict.
However, the US blockade remains in place, meaning nothing is moving in or out of the Strait of Hormuz. Oil prices remain elevated following the ceasefire renewal, so the energy market is not particularly optimistic about the Strait reopening either. That means the macro markets dichotomy remains, keeping us in a two-way risk regime.
Finally, I want to take the opportunity here to do a quick review of our model upgrade, one week in, as we started the new strategies shorting the market in many names:
A few observations since the model upgrades.
The leverage and short overlays are optional with higher risks. They amplify on both sides. When they’re right, we compound; when they’re wrong in hindsight, they can look bad. That’s the trade.
Take SPY as an example. If we implemented the strategy layer earlier, the short signal would have fired around mid-March, caught most of the late-March sell-off, then given some of it back as we ran higher through April. We established the short strategies just a week ago, so it feels like we only caught the wrong side of the move.
Some of that is also the unique macro regime we are in. The macro components (USO, UUP vs Equities, Crypto) decoupled faster than usual, and the rally came in just as quick. As we apply smoothing to avoid twitchiness, there is a reaction time in deciphering whether the “decoupling” is permanent or actually a mean-reversion opportunity.
What I am doing in the background
Not set-and-forget.
I am observing and continuously auditing our models to ensure that the fundamental logic and backtests are robust. At the same time, we don’t want to leak the recency bias and overfit our latest macro regime to a model that is built to win in the long term across multiple conditions.
I am building separate models as well so when we feel “why is the model saying this?“, there are more than just one pair of eyes examining the markets.
Thank you, everyone, for the support and patience as we improve.
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DISCLAIMER: This newsletter is intended for educational purposes only. Any information or analysis in this note does not constitute an offer to sell or a solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice, nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.
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