Introducing SwanGuard
Black Swan Market Crash Protection Strategy

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Optimists and Pragmatists

In a post COVID-19 investment world, optimists and pragmatists will naturally embrace the can-do ethos of German philosopher Friedrich Nietzsche: "that which doesn't kill us makes us stronger."

The COVID-Crash qualifies a "black swan" event, defined as being rare, unpredictable, and beyond the realm of normal expectations. The market's fall from its high on February 19th to bear market territory was the fastest on record. It was about 3x faster than 1929, 4x faster than 1987 and 6x faster than 1990 — the prior record holders.

The only thing even close within our lifetimes was the 1987 Black Monday crash. Both events are characterized by extremely sharp drops during a bull market. Just as the novel COVID-19 virus caught healthcare professionals without therapeutics or vaccines, it also caught investors and algorithms unprepared for the crash.

SwanGuard Upgrade: October 2024

Reduce Head-Fake Event Susceptibility

The brief August  2024 Black Swan event was triggered by Bank of Japan (BOJ) interest rate policy changes that led to a rapid unwinding of the Yen carry trade and a steep market selloff. Details about the triggering can be found in our newsletter of 8/6/2024 Perspective: SwanGuard Triggers. The BOJ surprisingly quickly softened its stance a few days later, halting further market damage and spurring an abrupt world market rebound. Such a sharp reversal resulted in a painful whipsaw loss for many, ourselves included.

Like an automotive airbag, the added safety in a real crash can be priceless. But, a nuisance trigger can be both costly and annoying. Our objective for this SwanGuard upgrade was two-fold: (1) substantially reduce the odds of head-fake nuisance triggers, and (2) in the event of a nuisance trigger, cancel SwanGuard as promptly as possible. We addressed each of these as described below:  

1.) We noted that all of the former SwanGuard events occurred within days just before the StormGuard Indicator went negative. However, for the August 2024 event, the StormGuard Indicator was relatively high and was increasing. Thus, there was no ominous problem with the market. It was a short-term news-driven knee-jerk. Thus, the new SwanGuard triggering test further requires StormGuard to be on a trajectory to cross into negative territory within two or three days (and does not wait for month-end).  

2.) We further noted that as soon as the BOJ softened its stance, the VIX volatility indicator quickly dropped below 20 and an aggressive rebound ensued. The offending problem had already evaporated. During prior valid SwanGuard events volatility remained quite high for many months. Thus, an early SwanGuard cancellation test was added that requires both a strong short-term market reversal and a swift return to low volatility.

SwanGuard Options Comparison

SwanGuard Off: If you favor simply riding through sharp market moves versus attempting to react and avoid some of their losses, then follow these special instructions to fully disable SwanGuard for any particular Strategy:  (1) add the tilde character "~" to the end of the Strategy's name, and (2) check and then uncheck the "New Feature Display" option in the Strategy Information popup (click the icon to access), and then click the Save button.  

SwanGuard Old: The Old original version of SwanGuard reacts the fastest to Black Swan events, but could occasionally be fooled by a head-fake news event such as in August 2024. Immediately following the deployment of this update, your Strategies will still continue displaying the same SwanGuard results UNTIL you edit them in some way. To maintain use/display of the original SwanGuard design, be sure to un-check the "New Feature Display" option in the Strategy Information popup (click the icon to access), and then click the Save button. Note, however, that future Black Swan events will be handled with the New version of SwanGuard.

SwanGuard New: The New improved version of SwanGuard reacts a little slower to Black Swan events to help avoid being fooled by a head-fake news event such as in August 2024. Immediately following the deployment of this update, your Strategies will still continue displaying the same SwanGuard results UNTIL you edit them in some way. To switch to the New SwanGuard design, be sure to check the "New Feature Display" option in the Strategy Information popup (click the icon to access), and then click the Save button. (Note: if it was checked prior to the update, to get synced you may first need to un-check and save it, and then re-check  and save it.)