Macro does not matter...
...for most of the time ;-)
I did a deep dive into Macro, and for years I researched on how to time the market.
What are the findings?
The market front runs GDP and Inflation, not the other way around
Liquidity is the main driver, but you do not need liquidity to detect a bull market (network momentum (aka Quads) is sufficient, a good strategy book will pick it up!)
Systematic Trading: a good strategy book will make money in Quad 1 (GDP up, Inflation Down), Quad 2 (GDP up, Inflation up) and Quad 3 (GDP down, Inflation up), the only Quad you need to fear (hedge!) is Quad 4 (both down).
So how to protect in a Quad 4?
I read Taleb over and over again until. I did not get it. Until: I backtested his approach + a ton of tape watching.
Left tail protection
Protect (Taleb: “always, do not try to time it”) against events when correlation get to 1, e.g. market crashes. So, the only position we need is a 5% left tail protection position, for that we need to be long volatility.
Have a look at VIXY in August 2024:
It went up > 125% in that mini crash.
Most of my systematic trading books were down 15-20%.
500k Portfolio, 20% DD —> 100k
5% VIXY Position —> 25k —> went to 57k
So, all in all the DD would have been 43k (so below 10%).
2022, Quad 3
But what about 2022, long vol protection did not work at all (QQQ 95%, 5% VIXY):
Well, 2022 was a Quad 3 (GDP down, Inflation up), so still (volatile) money to be made in Energy. Therefore, it does not matter if the long vol. position works or not, the longs need to carry the weight:
I know (above): not a nice cap curve, but Quad 3s are volatile and total return is stellar.
By the way, the above system is live here:
“Local Volatility”
The only thing you cannot protect against is local volatility, e.g. regular DDs of 10-15% without too much drag on the portfolio performance. In a DD of 10% a 5% long vol position will not have enough convexity to protect. And a higher long vol position will kill you in a bull market.
Back to Taleb: The main thing is to protect against a black swan.
And to live with local day-to-day volatility.
Love Quad 1 and 2, live with Quad 3 and protect against Quad4!
All the best and best regards
Andreas