When the market hits new highs it tends to excite the media. The S&P closed at its highest level since early February on Thursday. Such news may sound positive when delivered by an anchorperson. But since the beginning of 2002, when the market is trading below its 200-day moving average, there has been a strong tendency to pull back after hitting news highs. Below are results of some simple systems. These systems call for shorting the S&P 500 any time it hits an X day high while under the 200ma. The trade is covered when the S&P 500 next closes below its Y-day moving average.
All of the systems above have performed quite well on the short side. As you can see, hitting new highs really isn’t something bulls should get too excited about.
10 comments:
Rob,
How do you define a losing trade as per the simple shorting systems? Do you have a stop-loss that gets executed? How would that be?
Thanks, Joe
The exit signal is always a cross below the Y period moving average. Losers occur when the trade goes against you long enough that the average moves above your entry point.
For instance the 10 high entry 10 avg exit would have triggered a short on 3/12 and would have covered on 3/30 for a loss of 4.90%. Incidentally this was the worst loss for the 10/10 system over the time period shown (2002-present).
Rob
Thank you, Rob.
Would you be able to provide return statistics as if this was a trading system? Annualized Return, Risk, Sharpe, Largest Drawdown etc? Just to get a feel of the system.
As always, thanks for sharing your insights and good work.
Anon, I don’t think this is really a trading system in the common understanding of the term. I think it’s a guidance system.
We have here a big bouncy juicy market datapoint headed for Jupiter. Eventually like all rocket shots it will come back to Earth and contract.
At some point anyone LONG will be looking to place a STOP. This is one very intelligent and quantatively-justifiable way of going about this process. You cannot help but exit. And a Trader can actually make a realtime FEEL decision as to whether he wants to use a slower or faster responding filter even as he absorbs the minor news events of the day.
Today for example I used an 8day ema, a 5day ema, and a 10day ema at various points, depending on my outlook. All three fall within the System concept paraments.
Daniel
Rob,
I'm confused about the example you give of a losing exit signal. According to my charts, I do indeed see a 10-day spx high on 3/12. The high that day was 753. However, using the 10-day SMA, in appears to go above 753 on 3/23. Please help me understand and tell me what I'm missing here.
Good stuff Rob. Very cool. I like them simple like that.
I have one suggestion...
SPX is not tradeable. Thus, one might have to use Profunds or an equivalent fund that is highly correlated to the SPX in order to get results that are close to what is presented here.
Did you run the same tests on the SPY? I'm curious to see how much of the edge is traded out vs. SPX.
Thanks!
Yesterday, I divided my short position into two halves. Rode one out on an exit signal on the 8-day ema as stop. Rode the other out, a little deeper, on the 10-day, later in the afternoon.
As posted above, neither was "better", a matter of preference-- and both within Rob's study parameters.
--The kind of realtime 'usage' of a system which is hard to work into backtestings...
Daniel
Thanks for sharing this system. I wonder if the obverse works : going long SPY when $SPX above 200 MA and at a 10 (or whatever) day low.
Nice work, Rob. I've been thinking the same but good to see your numbers agree. Keep up the great work here. Thank you, Sir!
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