Monday, December 1, 2008

Where The Gains And Losses Have Been Made Over The Long Term

An interesting conversation I had with another trader a couple of weeks ago inspired me to take a look at market performance based on the market’s position relative to its moving averages. Below I broke down the position of the market into 4 quadrants: 1) Above both the 200ma and 50ma, 2) Above the 200ma and below the 50ma, 3) Below the 200ma and above the 50ma and 4) Below both the 200ma and 50ma. I used simple moving averages in all cases. The performance of the S&P since 1960 is shown by quadrant in the table below:



A few comments:

1) The biggest long side edge appears to be when the market is trading above its 200 but below its 50-day moving average. At this point the market is in a long-term uptrend but is not extended to the upside over the short-term.

2) There’s a clear distinction between long-term uptrend and long-term downtrend results. The simple rule of looking for long trades above the 200ma and short trades below the 200ma appears to provide an edge.

3) Going long when the market moved into quandrant 1 (> 200 and > 50) and exiting when it left this quadrant would have only been a profitable trade 29.8% of the time. The edge comes from the fact that some very big moves were caught.

4) Going short when the market moved into quandrant 4 (< 200 and < 50) and exiting when it left this quadrant would have only been a profitable trade 22% of the time. Again the edge comes from some very big moves – including the current move.

In the next few days I’ll show a similar test using shorter-term moving averages.

6 comments:

itrade4real said...

Excellent insight, Rob. On some level, I always felt this was the case. Thanks.

Anonymous said...

Two similar articles:
http://worldbeta.blogspot.com/2008/03/noise-10-best-days.html
http://worldbeta.blogspot.com/2008/03/more-on-volatility-clustering.html

Yaba Qi said...

What's the point talking about index points?
A 1960 point does not worth a 2000 point.

A better picture would appear with a percentage study, according to me.

Bill Luby said...

Interesting work, Rob; thanks for posting. The spaces between the 50d and 200d are particularly interesting...and warrant further investigation.

Cheers,

-Bill

Anonymous said...

i'm not sure this shows anything actionable. up points are earned when the market is up, and down points are earned when the market is down. eg, for a bull - better to buy dips in a bull market.

agree with commenter on the apparent absence of percentage-based/logarithmic scaling.

compliments to the chef: the SPYX posting from the weekend seems like pretty valuable work.

bhh said...
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