Friday, August 1, 2008

Another Large, Low Volume Drop - Massive Edge or Statistical Anomaly?

The market has been on a roller coaster ride lately. It’s been six sessions since the initial bounce off the July lows topped out. In the last six days the S&P 500 has closed either up at least 1.25% or down at least 1.25% five times. Three times it’s been to the downside. All three times the big drops came on lower volume. As you might suspect, seeing the S&P drop 1.25% on lower volume 3 times in 6 days is a fairly rare event. Below is a summary of how the market has traded following such events:


The number of instances is too low to make much out of but the size of the returns is certainly eye-popping. An average return of over 5% in the next 7 sessions. That’s a substantial pop to say the least. For those who would like to review the dates, they are all listed below. Notice how 2002 dominated the study.


While not statistically significant, I find the results noteworthy and interesting. So to the header question: Are we looking at a massive edge or a statistical anomaly?

I'll let you decide.

3 comments:

Johan Lindén said...

Most of us agree that one should make studies based on relativity more often than absolute values.

With all the studies you have that you put in % gain or lost as a criterion, which means most of your studies, wouldn't it be more accurate to normalize the lost or gain % depending on the type of volatility there was at that point.

For instance, if the 14D Average True Range is 0,75% and the SPX makes a 2% move it is much more significant than if the SPX make a 2% move and the 14D ATR is at 1,5%.

I can imagine that this takes a lot more work (or maybe not), but it would be interesting to try this hypothesis at least in 1 or 2 of your future (or past) studies to see if this makes the system even better.

Damian said...

Interesting Rob - I went back and looked at all those instances - I found it interesting that the setup was profitable during the 2002-2003 period (highly) but not so much outside of that period. What this suggests to me is that it was a particular characteristic of that sell-off period, while the period we're in now is rather different. So I would say "no" - and be ready to eat my words.

katallaxia said...

Sell 7 days later = 8 occurrences
Sell 1 day later = 23 occurrences

Why do you always [sic!] ignore "overlapping signals"? All [sic!] your "studies" catch the first occurrence/signal/trade only. If your EasyLanguage Code (I assume that's the prob) can't do the trick ==> Excel.