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Equilla Stress Test August 2019

While the 800-point drop in the DOW on Wednesday, August 14th cannot be called unprecedented (it was just the 4th largest drop in history) it was significant. When it is placed in context with the other events that took place within a two-week period (7/31/2019 to 8/14/2019) leading up to the drop the combination may be considered unique in market history.

  1. March 31st 2019 Fed Chairman Powell rattled the market by pronouncing that the 25-basis point cut the Fed had just enacted was a “Mid-Course Adjustment”. The market had anticipated it was the beginning of a rate cutting cycle.

  2. August 1st 2019 President Trump announced a new round of 10% tariff increases to take effect September 1st.

  3. August 5th the Chinese government let the Yuan drop below the psychologically important “7 level”, devaluing the currency in an apparent response to Trump.

  4. August 7th three central banks unexpectedly cut interest rates roiling an already skittish stock market.

  5. August 14th the ten year and two-year yield curve inverted briefly but that was enough to shatter the market and drop the DOW 800 points.

The extraordinary volatility during this two-week period provided a live market “Stress Test” for the statistical theory underpinning Equilla.


Stress testing is a form of deliberately intense or thorough testing used to determine the stability of a given system or entity. It involves testing beyond normal operational capacity, often to a breaking point, in order to observe the results. Reasons can include:

  1. to determine breaking points or safe usage limits

  2. to confirm mathematical model is accurate enough in predicting breaking points or safe usage limits

  3. to confirm intended specifications are being met

  4. to determine how exactly a system fails

  5. to test stable operation of a part or system outside standard usage


In “Stress testing” Equilla the objective was not to test hardware capacity or software resilience or even to check the software for latent bugs, operating system failures, memory leaks, etc.


The purpose was to prove the statistical theory (trading constrained uncorrelated volatility improves alpha) in a live volatility environment. To test the statistical theory in a live environment required live market volatility at abnormally high levels.


The VIX

At the height of the 2018 4th quarter crash the VIX stood at 36.07 on 12/24/2018. The August 2019 volatility event topped out at 22.43 on August 5th 2019. The August volatility provided such a live market volatility event.


The Subject Portfolio

The subject portfolio for this test is ESGX which is a pseudonym for the Nuveen ESG Large Cap Value ETF NULV. All mutual funds are required by the SEC to disclose the holdings quarterly. That information is publicly available. To establish the ESGX portfolio we downloaded the actual holding of the NULV ETF. The reason was simple. We wanted a professionally designed portfolio built by an unrelated and therefore impartial third party.



The Fund employs a passive management (or “indexing”) approach, investing primarily in large-capitalization U.S. equity securities that exhibit overall value style characteristics and that satisfy certain environmental, social and governance (“ESG”) criteria.


Index Description

The TIAA ESG USA Large-Cap Value Index (the “Index”) is primarily composed of equity securities issued by large capitalization companies listed on U.S. exchanges. The Index uses a rules-based methodology that seeks to provide investment exposure that generally replicates that of large-cap value benchmarks through a portfolio of securities that adhere to predetermined ESG, controversial business involvement and low-carbon screening criteria.

Equilla has been managing this portfolio since May 15th, 2019.

The theory behind Equilla is: “Trading constrained uncorrelated volatility within a portfolio increases alpha”. If the theory behind Equilla is sound the subject portfolio should actually increase as a result of the combined volatility over the two-week period.



The S&P dropped from 3,025 on 7/26/2019 to 2,847 on 8/15/2019, a drop of 178 points or -5.9%. During the same period, the “Delta” (the difference between a “Buy & Hold” portfolio and an identical portfolio managed by Equilla) for the subject portfolio ESGX was up 44.9%.


This is the Delta (difference) between a "Buy & Hold" portfolio and the same portfolio managed by Equilla

The First Four Volatility Events

  1. March 31st 2019 Fed Chairman Powell rattled the market by pronouncing that the 25-basis point cut the Fed had just enacted was a “Mid-Course Adjustment”. The market had anticipated it was the beginning of a rate cutting cycle.

  2. August 1st 2019 President Trump announced a new round of 10% tariff increases to take effect September 1st.

  3. August 5th the Chinese government let the Yuan drop below the psychologically important “7 level”, devaluing the currency in an apparent response to Trump.

  4. August 7th three central banks unexpectedly cut interest rates roiling an already skittish stock market. While this caused significant intra-day volatility the stock market closed essentially flat.


First four volatility events and the impact on the S&P 500


Equilla's response to the first four volatility events

The above chart shows the Performance Delta

When a trade group is initially established (instantiation) Equilla makes two copies of the assets contained in the portfolio. The first copy is called the Static Portfolio. The second copy is called the Equilla Portfolio. The Static Portfolio is maintained exactly as it existed on the day of instantiation.

Dividends are applied to both the Static and Equilla Portfolios as they occur.

Any purchases or sales initiated by the portfolio manager are applied to both the Static and the Equilla Portfolios as they occur.

All Equilla trades generated by the trading algorithm are executed solely against the Equilla Portfolio. The Equilla Portfolio is the live portfolio. The Static Portfolio exists for the sole purpose of being able to measure the performance added to or subtracted from the live portfolio (the Equilla Portfolio) due to Equilla’s trading algorithm. The difference in value between the hypothetical Static Portfolio and the live Equilla Portfolio is called the Delta. The Delta is the metric used to assess Equilla’s performance. The Static Portfolio represents what the portfolio would have been worth if you were not using Equilla.



A key concept in “Performance Harvesting” is the “Accumulation Staircase”. The performance delta (the difference between the Equilla portfolio and the Static portfolio) increases over time in increments much like steps in a staircase. When the market declines (red arrows) Equilla buys shares (Investing). At the bottom of the “V” Equilla holds more shares than were held when the decline began. As the market increases (blue arrows) the performance delta will rebound to a higher level because of the additional shares held. As the market moves up Equilla will periodically sell some of the appreciation (Harvesting), essentially putting money in the bank for the next inevitable down turn.


What Equilla Harvested and Invested



When the market is moving up Equilla sells portions of high volatility assets and uses the proceeds to buy shares in the lower volatility assets within each trade group. When the market reverses and is in a down trend Equilla sells low volatility assets and buys high volatility assets. When the average standard deviation of assets bought is lower than the average standard deviation of the assets sold Equilla is Harvesting appreciation (putting money in the bank). When the average standard deviation of the assets bought is higher than the average standard deviation of the asset sold Equilla is re-investing (taking money out of the bank to buy shares).


HARVESTING = sell high volatility and buy low volatility

INVESTING = sell low volatility and buy high volatility


Since this volatility event (like all volatility events) was negative and resulted in a down market over a two-week period Equilla was able to be primarily an invest


The Fifth Volatility Event the Yield Curve Inversion




The yield curve inversion on the 14th resulted in a decline in the DOW of over 800 points, the S&P 500 lost 89 points.



This provided Equilla with another opportunity to invest and on the 15th as the market experienced a modest improvement the result was an $87,000 increase in the Delta.





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© 2019 BovaMetrics Colossians 3:23

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