Wednesday, December 31, 2008

Last Day of Year Based on YTD Performance

Below is a table that shows performance on the last day of the year if the year-to-date performance leading up to that point is below X%.

It appears there has been a bit of a tendency for bad years to finish on a good note.

Tuesday, December 30, 2008

Should You Time The Entries Into Your 401k?

With market action slow over the last week I thought I’d address a question I received about 401k timing and RSI(2). From David recently:

“Could 2 period RSI be used to produce better dollar cost averaging returns in a 401k?Instead of doing 401K contributions on 15th and 30th of every month, what do you think of having the contributions go into a money market account, and waiting for the next RSI<20"

I ran a test from 1/1/98 to sometime last week. If someone placed $100 into their 401k twice a month for the last 11 years the total invested would be $26,400. (I used the 1st day of the month and the 1st trading day after the 14th for simplicity.)

If their returns matched the S&P 500 that $26,400 would now be worth $19,748.34.

If instead of investing the $100 on or about the 1st and 15th, the person decided to enter on pullbacks to where the 2-period RSI was below 20, the $26,400 would now be worth $19,777.66.

In other words 11 years worth of effort would have made them an extra $30.

The issue is they are only making $100 trades the entire time. $30 isn’t great but it isn’t terrible when you’re only trading with $100.

The lesson here is that trying to time the entry of your money into your 401k is a waste of time. If you are going to boost your returns you need to focus on trading the account.

Monday, December 29, 2008

Gap Shrinkage & What It Suggests

Measures of volatility I provide charts of in the subscriber’s section of the website include the Absolute Average Gap of the SPY and Nasdaq. The current chart for the SPY may be found below. Note how it has gone from extremely volatile relative to the norm to extremely muted.

The 10-day Average Absolute Gap moved to less than ½ the 100-day average absolute gap last week. Since 1993 there have been 221 days where the 10-day reading has been less than half the 100-day reading. The average performance on the day following such low readings has been negative 0.035%.

Taking a broader view of this indicator I broke it down by times the 10-day exceeded the 100-day average absolute gap and times the 100-day exceeded the 10-day. When the 10-day has exceeded the 100-day (signifying the market has been subject to gap more than usual as of late) the average 1-day return for the SPY was 0.027% . When the SPY was gapping less than usual (the 10-day was less than the 100-day) the average 1-day SPY return was 0.018%. In other words the market has performed 50% better following periods when is has been more gappy than average vs. times when it’s been less gappy than average.

Tuesday, December 23, 2008

Twas 3 Nights Before Christmas

With only two trading sessions left until Christmas, we are now in a seasonally strong period for the market. Below is a breakdown of the last 21 years and how the S&P has performed from this point forward.

The next 1 to 5 days have been especially bullish. If you decided to buy the close 3 sessions before Christmas and then sell the 1st profitable close after entry then 18 of 21 trades would have been winners within 2 days and 20 of 21 within 5 days.

Monday, December 22, 2008

Nasdaq Volume Spyx Suggesting A Short-Term Drop

On the front page of the website I currently show the S&P 500 Volume Spyx chart every night. Subscribers also see the Nasdaq Volume Spyx chart. (More information on Quantifiable Edges Volume Spyx indicators are available here.)

Below is a copy of Friday’s chart. The -18.66 reading is extremely low.

Options expiration may have had something to do with the unusually low reading, but rather than try and justify it away I decided to look at other times where the Nasdaq Volume Spyx came in extremely low. I set the parameters at -5 or below to get a decent sample size:

The results above are quite bearish short-term. Especially interesting is the fact that of the 26 occurrences, every single one of them posted a close below the trigger day close within 3 trading days. If the perfect record is to hold up, the Nasdaq will have to post a close below 1564.32 by Wednesday.

Thursday, December 18, 2008

Is The Break Above The 50-day MA Likely To Ignite A Strong Rally?

The big Fed rally on Tuesday pushed the S&P 500 above its 50-day moving average for the 1st time since September. Bespoke put together some stats on how long other downtrends have remained below their 50-day moving average. I was curious to see how the S&P has performed in the past when it’s risen through its 50-day moving average after spending a lengthy period of time below it. Is it likely to spark a buying spree?

After other similar circumstances the positive edge only lasted about 6 weeks. (Note the Average Trade column peaks at 6 weeks.) Over the 6-week period the average gain is only 2%. Winners gained 5% on average, which isn’t terrible. I also found it notable that the maximum gain was 13.75% for the subsequent 6 weeks. For some perspective, since the November bottom 4 weeks ago the S&P is up about 22%. For the market to match the performance of the last 4 weeks over the next 6 it will need to do about 160% better than it ahas ever done under similar circumstances. Looking out 15 weeks (75 days), the market still has never rallied 22% after spending 50 or more days below the 50-day moving average.

Also interesting is that the worst 6 weeks was down less than 11%. This suggests a trading range may be more likely than a runaway move up or down.

To baseline the results a little bit I also looked at 50ma crosses when the S&P hadn’t spent at least 50 days below the average:

Nothing Earth-shattering but it outperforms the 1st scenario over most time periods and the gains are certainly much steadier.

Wednesday, December 17, 2008

Market Performance In Relation To The 50 & 10-day MA's

A couple of weeks ago I looked at a breakdown of how the market has performed historically in relation to some longer-term moving averages. Today I’m going to take the same approach, but instead of using the 200-day and the 50-day for study, I’ll look at the 50-day and 10-day.

As I did with the 200/50 quadrant tests, I first broke the performance down by the number of points gained or lost from 1960 – present. (Click on any table or chart to enlarge.)

At first glance the numbers should look surprising. The most points gained have come following days where the market closed below both its 50 and 10-day moving average. Don’t bother thinking too hard about these numbers. They lie. The reason they are able to lie is that the results have changed dramatically from the 60’s and 70’s to the last 10 years (when the level of the S&P has been much higher). To illustrate this I will break down the performance using a set $100k/trade rather than S&P points. Below are equity curves broken down by quadrant as I did for the 200/50 a couple of weeks ago:

First let’s look at performance above both the 50 and 10-day moving average:

This chart is very similar to the same quadrant when looking at the 200/50 test. Good follow through was seen when the market was near its highs up until about 1988. From 1988-2000 the edge was weaker. Post 2000 is has been non-existent. Even the latest bull market from 2003-2007 failed to make much headway when trading above these two lines. I noted a few weeks ago that bull market saw little in the way of enthusiasm near highs and this is more proof of that.

The next chart shows performance after the S&P closes above the 50 but below the 10-day moving average.

During the 60’s and 70’s this was not a place to be buying. Since the late 80’s this quadrant has generated some nice returns. The shape here is again somewhat reminiscent of the 200/50 chart of the same quadrant.

Now quadrant 3 – Similar to 2 weeks ago this is where the market has spent the least amount of time.

Again somewhat similar to the last test. This quandrant has done fairly well historically – mostly as the market emerges from below. The last two bear markets have seen some steep losses from this area, though.
Lastly a look at trading below both the 50 and 10-day moving averages:
During the 60’s and 70’s this quadrant consistently lost money. Since the mid-80's pullbacks into this quadrant have often been buying opportunities. It has suffered during the last 2 bear markets. This suggests you're beter of attempting longs in this quadrant during a bull market.

A few quick observations to take from the above:

1) Whether using the longer 200/50 moving averages or the 50/10 moving averages the results look fairly similar.
2) It’s been a good 10 years since chasing strength worked and a good 20 since it’s worked well.
3) Pullbacks in uptrends have provided the best long-side opportunities over the last 20 years.
4) During vicious bear markets like the current one, buying below the 50-day moving average can be a difficult and dangerous endeavor. (See quadrants 3 & 4.)
I've had some inquiries lately about people looking to purchase an annual Gold or Silver subcription as a holiday gift. One concern has been timing in that they didn't want the subscription to run out too early. Therefore, I've decided any new 1-year subscriptions purchased between now and 12/31 will automatically run through 12/31/2009. (You may click here for a features breakdown.)

When The Fed Sparks A Rally To A 10-day High

Last night I looked at all times since 1982 the S&P 500 rose 1% or more on a Fed day and closed at a 10-day high:

The edge isn’t as prevalent initially, but over the next 2 weeks a downside tendency can be observed. Not shown above is that 70% of all instances closed below the close of the Fed day within the next 3 days. While this isn’t one of the strongest edges we’ve seen, it does suggest a pullback is the odds-on play. I also thought it was worth adding to the Fed Day Studies.

Tuesday, December 16, 2008

Fed Studies and RSI(2)

Tuesday could see some sharp moves thanks to the Fed. I’d encourage readers to review some of the Fed studies I’ve posted previously. One thing to keep in mind is that strong reactions to the Fed can often be faded over the next few days.

I got Larry Connors new book, “Short Term Trading Strategies That Work” in the mail yesterday and have read most of it. While a good portion of it has been covered by him before either in other books or on the TradingMarkets site, there are a few new ideas in there. If I can take one idea from a trading book and easily test or apply it to my own trading then I consider it worthwhile reading. This book has more than one.

There was a chapter on the RSI(2) that was quite interesting. I was pleased to see his findings were similar to Michael Stokes recent findings as well as Damian Roskil’s. Others who have published useful information on RSI(2) include Woodshedder, BHH at IBDindex, and Dogwood.

Monday, December 15, 2008

Option Claus

No doubt traders will hear about a possible “Santa Claus Rally” many times in the next few weeks. When looking at the S&P 500, though, I found the best week in December to be option expirations week. The edge has been especially pronounced over the last 24 years. During that period the market has closed the week higher about 81% of the time.

Monday, December 8, 2008

FTD's After the Crash of 1929

The market posted a Follow Through Day again last week. This is at least the 6th Follow-Through Day since the 2007 top. New blog readers may want to check out the series of studies I’ve written on Follow-Through Days (FTD’s) to gauge their usefulness.

There are some issues a trader would have if they used a FTD as a market buy signal. (This is not the recommended use by IBD, but does help to determine the predictive power of FTD’s when conducting studies.) One issue is that they tend to commonly fail during difficult bear markets.

Several weeks ago in the Subscriber Letter I posted a study which looked at FTD effectiveness following the Crash of ’29. (This study only looked at the Dow.) Below is an excerpt from that Letter:

I thought it would be interesting to see how FTD’s performed following the 1929 crash. As a brief reminder, “success” for a FTD would entail either 1) The market making a new high or 2) a rally from the close of the FTD that equals at least twice the distance from the low to the FTD. Below are charts spanning the period from 1929 to in 1932.

In this chart we see several failures and one FTD that led to a rally meeting its target. While it didn’t meet the definition of success, the rally in the early part of 1930 was actually the best over the time period.

Next is ’31 – ’32:

Plenty more failures are seen here before the market finally bottoms in mid-1932. All told there were 13 failed FTD’s and one successful one before the 1932 bottom arrived.

A FTD is a positive sign when looking for a potential market bottom and subsequent rally. The current rally attempt may succeed. The market certainly seems overdue for a substantial and sustained rally. FTD and other bottoming signals have proven far less reliable over the last year. There have been a few other times where they have struggled as well. The period above is one example. Just something for the back of the mind as the current rally attempt unfolds.


Anyone who would like to purchase the FTD code for their own testing may do so here.

A note to blog readers: I will be out of action most of this week. There may not be any other posts until next week. Fear not. I shall return to the blogosphere next week with a vengeance. – Rob

A note to Gold & Silver Subscribers: I completed implementation of a new distribution system. I believe everything is working fine. If you did not receive tonight's Letter, please contact me ASAP.

Thursday, December 4, 2008

Volume Spyx Patterns

A quick look at the S&P 500 Volume Spyx chart below (and available each night on the home page) shows that while the market rallied on Tuesday and Wednesday the Spyx level rose. This is in contrast to other recent rallies where the Spyx fell as the market rose. This is potentially a good sign. Let’s look at the volume Spyx pattern in detail to see why it may be a positive. Then I’ll offer my thoughts at this time and also compare it to standard volume patterns. (Those not familiar with Volume Spyx may click here to learn more.)

First, below is a table showing data when a two-day market rise occurs with increasing Spyx levels:

While not overwhelmingly bullish, there is a clear upside edge over the next 1-10 days based on this pattern – especially day 1. The average day over the entire time period only gained $24, so the difference is substantial.

Now let’s see what happens when only 1 of the days occurs with a rising Spyx:

Very choppy action with a slight negative overall tilt.

What if the Spyx sinks both days while the market rises?

Results here are quite a bit worse on average. It’s still close to a 50/50 proposition but risks clearly outweigh rewards.

I did look at how the 1st (bullish) test has performed over the especially choppy and bearish period from 6/1/07 to now. Over this time there have only been 4 instances and results were split. As challenging as the current market is I’m not prepared to view the results in a clearly bullish light. I do think it’s better than seeing either of the alternatives though.

Lastly, I took a look at running similar tests using straight volume instead of the Quantifiable Edges Volume Spyx to see if it provided the same edges. First I present the “bullish scenario” with two up days on rising volume:

Here again we see an upside bias. The problem is it is not nearly as pronounced as when using the Spyx. In fact it’s about equal with the long-term drift of the market, which suggests no significant edge.

What if we look at the bearish Spyx scenario using volume as a substitute?

Rather than clear downside edge what we have here is again less pronounced. The suggestion is chop rather than true downside.

Several times lately I have substituted Volume Spyx levels for actual volume levels in testing patterns and found the edge to be more pronounced. The S&P 500 volume Spyx is updated each night on the home page. It can be viewed for free. Gold level subscribers are able to download historical data on both S&P 500 and Nasdaq Volume Spyx Levels each night for research or further evaluation.

I will continue to provide updates and research associated with this newly published tool.

Wednesday, December 3, 2008

Gold Level Subscription Scorecard For November

While the market once again struggled mightily in November, the volatility made for some nice opportunities for Gold Level Subscribers. Once again this month Quantifiable Edges proprietary Catapult trading strategy which underlies the CBI was best able to take advantage of environment. It was designed to prosper under extreme selling conditions. It has performed exceptionally well the last 2 months with big gains also coming in October.
Before revealing the results, some important notes to review:

I don’t suggest position sizes. The primary reason for this is I’m not acting as a financial advisor. I don’t feel it is appropriate to suggest allocation sizes without understanding someone’s financial situation and risk tolerance. Even for my own trading I run different portfolios with different levels of aggressiveness. For instance, my most aggressive portfolio is my IRA. Here I may use options to sometimes get 400-500% leveraged. Other portfolios on the other hand normally take much more conservative stances and some rarely reach or exceed 100% exposure.

Since I don’t suggest position sizes this is should not be considered a performance report, but rather a trade idea scorecard. Therefore, no matter how objective I try to be the reporting of the results is always going to be skewed depending on how you approach the trades. For instance, I always recommend scaling into the Catapult positions in 3 parts, whereas the “System” trades (whatever system I unveil other than Catapult) are normally one entry. The “Index” trades I normally recommend scaling into as well. For my own trading I trade much larger size with the index trades than any of the individuals. I also control my exposure by limiting the total amount invested per day. As I mentioned, this will vary depending on the account I’m trading. My most aggressive account I may put in up to 100%/day and get heavily leveraged using options. A more conservative account may max out at 15%-20% per day.

It’s unlikely anyone would have taken all of the trades with equal amounts, so personal results would vary greatly depending on the trader’s approach. Still, there was more than ample opportunity to take advantage of the Quantifiable Edges trade ideas in November. With all those caveats in mind, results are listed below and broken down by category.

All of the individual trades are listed in the December 3, 2008 Quantifiable Edges Subscriber Letter. I'll be happy to provide a copy of this Letter to anyone who signs up for a free trial subscription.

5% Drops Revisited

About a month ago I showed how the S&P 500 has performed following days where the market dropped 5% or more. In most cases such a strong reaction was an overreaction and the market closed above the close of the 5% drop day shortly thereafter.

Since I showed that table a month ago we have had SIX more 5% drops. Five of the six saw the same pattern with some kind of bounce in the next few days. Below I’ve updated the table which lists all 5% drop days and whether they closed above the 5% drop day close in the next week.

Tuesday, December 2, 2008

Detail & Evolution of the 200/50 Quadrants

I decided to do a follow-up on yesterday’s post and include some pictures. What we’ll uncover through this exercise is that the edges aren’t quite as cut and dry as they might appear by simply looking at the end results. (Hint: they almost never are.)

Rather than view a table I’ve put together 4 equity curves based on owning the S&P when it was in a certain quadrant. I’ve also changed the test to buy $100k worth of the cash index rather than 1 share. This effectively gives us percentage returns. It also changes the end results slightly so you’ll need to be aware of the differences.

First let’s look at owning the S&P when it’s above the 200 and 50 day moving averages. Recall from yesterday that since 1960 the market has spent 53% of its time in this quadrant:

Over time this market position has been a steady winner. It has sat out bad drawdowns and has had some nice upside participation. I find it interesting that it peaked in 2000, though. The most recent bull market of 2003-2007 failed to see much headway at all when the market was above these two lines. I would classify it as a weak bull. It was extremely rotational and saw little in the way of buying enthusiasm when the market began hitting new highs. While I observed these characteristics at the time, this is the first time I’ve viewed it in this manner.

Now the 2nd quadrant – above the 200ma and below the 50ma. Recall from yesterday that since 1960 the market has only spent 15% of its time in this quadrant:

Here we see that this was not a bullish quadrant to be in until the bull market of the 80’s began. During the 60’s stocks spun their wheels in this area and during the 70’s they lost money. The total gains are not as large here as in Quadrant 1 when looking at percentage gains. Yesterday they were larger when looking at point gains. That’s due to the fact that this quadrant did its losing early on when the points were low and its winning more recently when the points were high. Thus the point gains were a bit exaggerated.

The exaggeration is not a bad thing. In fact, using points rather than %’s basically front weights more recent developments. Think of it as an Exponential Moving Average vs. a Simple Moving Average. The gains since 1980 have been much greater per day in here than in Quadrant 1. The total percent gained is almost the same over that time and the market has spent over 3 times the amount of time in quadrant 1 vs. quadrant 2. (55% vs. 16% since 1980) Again, Quadrant 2 outperforms Quadrant 1 although its not as obvious just from the graph. Short-term pullbacks in long-term uptrends have made for good buying opportunities.

Now Quadrant 3 – below 200ma and above 50ma. The market has spent its least amount of time here – only 9% of days since 1960:

This has basically been a pass-through quadrant. When the market is emerging from a bear and beginning a new bull some gains are to be found here. I also broke this down by where the quadrant was entered – did it come from 1 or 4? Not surprisingly almost all gains were realized when this quadrant was entered from Quadrant 4 and moving up.

Now let’s look at Quadrant 4 – below the 200ma and below the 50ma in which the market has spent 23% of its time.

A few spikes up when the market was emerging from a bear market or steep correction. Other than that it was not a place you wanted to bet on the long side. When the market enters this quadrant from above it’s probably best to adjust your strategy and trade in bear market mode.

A big take-away is that the market evolves over time. Sometimes this is missed when looking only at tables. Sometimes equity curves are able to capture this well. By understanding how the market has reacted in the past, especially the more recent past, we can better adapt our trading to take advantage of its movements.


Other bloggers who have written about evolving markets in detail include Michael Stokes at MarketSci. (His S&P 500 vs. Consumer Discretionary post is one recent example.)

Dr. Brett Steenbarger of Traderfeed also discusses market evolution and he had an especially interesting post today about how reaction to bearish momentum days has changed over the last several years.

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.