VIX vs Italy: Rules vs Opinion

I am faced with the following dilemma:

1. I believe in rules and strategy-based trading. I believe one must not deviate from the “rules”.
2. I can “see” risks that are not incorporated into my model(s).
Let me put this in context.
From a quant point of view (at least a simple, price-based quant model) a jump in VIX of 30%+ does signify an event. Some strategies will enter a mean reverting mode, some will sell-off to avoid a volatile environment, some will jump in and double down, some will sell options, etc.
Quantitatively speaking, one may start by looking at other instances where the VIX jumped more than X% and see what happened in the next few days (here, here , here and here).
From a fundamental (and common sense) point of view, the event that caused the VIX to jump was the outcome of the Italian elections. This is by no means a minor event. It is the first time the south European public votes against German imposed austerity, something that surprisingly  has not yet happened even in Greece (@34% unemployment… how long can that last?), Spain (@20%+ unemployment) or more recently, Cyprus.  This could cause fundamental long term changes to Europe and affect the U.S. market as well.
For illustrative purposes only, I created a simplistic diagram of outcomes following the Italian Elections:
No-matter what the final outcome, halfway through the diagram, there is a lose-lose situation. In other words, one can argue that until the Italian Elections are conclusive, it is not in the interest of the ECB or Germany to stabilize the markets, especially the Italian sovereign spreads.  So if we were to accept the logic of this diagram, even the market-positive outcome assumes a bearish transitory period.
So how does one incorporate this theoretical “belief” without diverging from the systems in place?
One solution is to do nothing and stick to your guns.
Another solution is to get out of the market and stay cash. 
But when do you come back in? How do you decide when the danger is over. When the market has already advanced another 15% while sitting in cash?
A third solution is to turn-on alternative strategies. These could be tail-protection* strategies.
There are many ways to protect from tail risk. Some are better than others. Most cost money in a bullish environment. An obvious example is buying puts. That could protect your positions but if the crash never materializes, the cost of the puts would eat into the returns.
Well, nowadays a retail investor has access to other protection than just buying puts. 
One way to find such a strategy is to split existing strategies into their short and their long components and trade just the short one as a hedge to existing positions.
Take MarketSci’s proposed strategy as an example. As of yesterday the VIX futures are barely in contago, which means that the strategy is ready to go long the VXX.  
Here’s another strategy that it’s short side may work in a bearish environment.
One way to solve the subjective opinion vs objective model dilemma is to create a strategy that is both agreeable to your subjective opinion and has done ok historically. Then instead of trading the subjective belief you trade the model that incorporates it.
If you cannot find a good model that incorporates it, chances are you shouldn’t trade those beliefs in the first place.
*Tail protection is a fancy way of saying protection from abnormal events such as sudden market crashes. 

** This information is not to be construed as financial or investment advice. No information herein should be taken as a recommendation buy, hold or sell any investment or to use a specific investment strategy

Raging Bull

It seems that most of the strategies that are in the public sphere, are consciously or unconsciously trying to prevent the large 2007-2009 draw-down. From simple to complex Tactical Allocation Systems, to mean-reverting strategies, to volatility based strategies, pairs strategies, etc. They all avoid (in hindsight) the biggest market crash that most of us have experienced.

But what happens in a Bull market? Most of these strategies will under-perform.

I will make an assumption, here:
Whatever strategy exists, if it is ‘well performing’ and is ‘known’ it will be imitated by more and more and eventually the ‘market’ will change in such a way as to make the strategy not work anymore. The market (or rather, the participants) will ‘adapt’ to the strategy.

Sample Tactical Allocation strategy: Immune to the 2008 drop but less so to the 2011 drop and 2012 bull run.

And let’s just say I was to join ranks with those ‘market paranoids’ and look at ways on how the market is out to “outsmart’ me. How could the market do that. What strategy would it employ?
Well, it would do what it has recently done:

Go up. Just up.

Most strategies I deal with have some kind of neutral outlook. I am fine with the market going no-where. I also like downside protection strategies that stand to benefit on a large downturn, either by shorting, hedging or playing the rise in volatility. What about raging Bull market? Where’s the 2004-2007 index-beating straight-up bull strategy?

So here’s one.

So yes, this has been a great bull market strategy. But during 2009-2012, when the SP500 did exceptionally well (and ’emerging’ equity did less so) this remained fairly flat.

 I will not tell how it trades since I am sure you can build a better one. I will tell you that it trades country indices (data)*. You can get started by thinking of momentum vs value strategies.  I will also tell you what the current positions are:

See the catch?
How do you trade the Ukraine Index? Or the Lebanese?
So maybe Institutional investors are not ‘smarter’. Maybe they just have more access to data and instruments.

If you know how to trade these indexes, or you live in these countries, drop me a line and tell me what you think, either here or via e-mail.

So far I only found etfs for Greece: GREK and GRE.PA

*Data used from MSCI Indexes.