The idea is simple. This strategy is essentially meant to capitalize on the panic in the market by buying when the market is in a panic and selling after the markets calm down.
- Getting in when an n-standard deviation event is observed in the space of market returns, buy in by some predetermined amount up to some risk limit in leverage.
- Getting out when the absolute returns are less than the calculated conditional standard deviation of the return distribution persistently for several days, this indicates that the market has returned to something of a normal state and the panic has passed.
The conditional return distribution of the SPY is based on fully flexible probabilities which could be used in other strategies as well.
This strategy obviously performs best for the patient investor and will not perform well in backtesting periods ending in recessions as it will be taking heavy paper losses. I am aware that the position would be subject to margin calls and may be subject to premature shutdown but by the same token, these shortcomings are known in advance, thus they should be easier to plan for in an implementation environment.
Comments and advice are greatly appreciated!
