Thursday, December 31, 2009

Best of Quantifiable Edges 2009

So the other day I ran a “Greatest Hits” of 2009. They were the most popular posts I wrote each month of the year. When going through them I realized I would have chosen very few to make any kind of top list myself. So now I present to you MY picks for the “Best of Quantifiable Edges 2009”. (Note while there are only 1 or 2 on the other list that would have had a chance to make this one, I didn’t allow for repeats. These are all less popular than those.) In countdown reverse order…

15) Equity Put/Call Ratio Suggests Down Day
14) The 2009 Rally - Breadth Without Compare
13) 3 Lower Closes - A Largely Misunderstood Edge
12) My Take On Optimal Position Sizing
11) Turnaround Tuesdays (A myth that actually confirmed!)
10) Stops Part 2 - When to Use Them
9) Gaps Up From 10-day Highs
8) Intermediate-term Consequences of a 30’s-Like Market (I still believe the market will undergo several intermediate-term exaggerated overreactions in both directions over the next few years.)
7) Some simple shorting systems
6) A Long-term look at Put/Call Ratios
5) The Importance of Positioning In Analysis
4) Distribution Days Quantified (Tradestation code associated with this study is available on the Free Downloads page.)
3) A Long-Term Look At Fed Days
2) My Interview With The Kirk Report (More than just a post. This is long but Charles Kirk got more info out of me than the rest of these posts combined.)
1) The Quantifinder Unveiled & Quantifying The Value of Historical Research (These tools represent Quantifiable Edges biggest accomplishments this year – effectively semi-automating the application of historical research to trading.)

I’m very much looking forward to 2010. The Quantifiable Edges Big Time Swing System was just released and feedback so far has been great. I’m excited to monitor the progress of that in the upcoming year. Additionally, I’ll have more announcements in the coming weeks about improvements and new features for the website.

A safe and happy New Year to all. Thanks for reading, writing, and inspiring me throughout the year!

Monday, December 28, 2009

Quantifiable Edges Greatest Hits of 2009

So my son got Band Hero for Christmas and the Hannas now rock. Like a rock band, I decided Quantifiable Edges needed to release a “Greatest Hits”. The list below shows the most popular post (by number of hits) for each month of 2009. I’m calling it “Greatest Hits” because it is based on popularity. I don’t think it’s a “Best Of”. Many of my favorites were excluded and some of the ones below I didn’t think were all that great. So perhaps I’ll have some time to put together a “Best Of” later this week.

Jan – Stops Part 1 – When Not To Use Them (Somewhat controversial post here. One I should perhaps expand on at some point.)

Feb – 2% Gaps Down Revisted (We see here that large gaps down often fail to hold over the next few days.)

Mar – Why Tuesday’s 90% Up Day May Not Be Bullish (The implication of this popular study couldn’t have been more wrong.)

Apr – The Most Overbought Market In At Least 23 Years? (Based on a short/intermediate-term indicator.)

May – A Simple & Powerful Timing Indicator (Includes a heavily downloaded free spreadsheet available on the free downloads section of the website.)

Jun – From A High To A Low In 1 Day (A study that looks at a fast move from the high end of the market’s range to the low end.)

Jul – What Happens After A Sharp Contraction In Volatility (I now track this indicator each night on the members charts page. There are also a few studies associated with it that are tracked by the Quantifinder.)

Aug – Percent of Stock Above Their 200ma’s Hitting Extreme Levels

Sep – Never Have So Many Stocks Been So Stretched Above Their 200ma (I’m seeing a theme here. Everyone loves to hear how we’re hitting all-time extremes. It’s like when I was little and I would be excited when the weatherman said we made a record high or a record low on the day.)

Oct – Extreme Weakness Never Before Seen By This Measure (The measure was the McClellan Oscillator. The comparison was a little unfair since it used the standard McClellan Oscillator rather than the ratio adjusted version. I now track the ratio adjusted version on the members charts page. Traders not familiar with the McClellan Oscillator should familiarize themselves with it. And while the oscillator has been around a long time, the McClellan’s continue to do good work to this day. The “Learning Center” on their website is full of goodies. )

Nov – What A Strong Early Tick Has Meant In The Past – Perhaps I’ll need to post more intraday edges in 2010.

Dec - Twill Be 3 Nights Before Christmas (A seasonal study. It was only posted about a week ago.)

Wednesday, December 23, 2009

Introducing The Quantifiable Edges Big Time Swing System

After much hard work I am pleased to announce the release of the Quantifiable Edges Big Time Swing System. The QE Big Time Swing System simply combines a few of my favorite edges into a powerful new swing trading system. The system was designed to trade the major indices. It looks to take advantage of high probability, high expectancy moves that generally occur about once per month. Using SPY over the last 16 years it has shown great consistency in both profits and frequency of opportunities. The system trades both long and short in both up and down markets.

It is not a black box. It is completely open sourced and Traders may even elect to purchase the open code in Tradestation and Excel formats. While it’s completely open it still comes with a supporting web page for purchasers as well as a 2010 alert service at no extra cost.

I’m extremely excited to be able to offer it at this time. I'm confident it will help some traders improve their results in 2010. For more information please visit the Quantifiable Edges Big Time Swing overview page.


If you have questions after viewing the information page, feel free to email them to BigTimeSwing @ QuantifiableEdges(dot)com

Index Put/Call Closes Below Equity Put/Call

Due primarily to some massive trading in index calls in the last ½ hour of the day on Tuesday, the CBOE index put/call ratio actually finished lower than the CBOE equity put/call ratio. This has only ever happened 4 other times since they began tracking the data in 2003. It’s dangerous to try and draw conclusions from only 4 instances, but I found the results below interesting enough to share. I’ll continue to monitor this setup in the future to see if the early indications hold true.

As you can see, indications so far seem to suggest a downside edge both short and intermediate-term.

Tuesday, December 22, 2009

Twill Be 3 Nights Before Christmas

At Tuesday’s close we will enter the next strongly bullish seasonal period. Last year I showed the “Twas 3 Night’s Before Christmas” study. I have updated that study below.

Monday, December 21, 2009

High Vol Rise on Op-ex Day - Good or Bad?

Option expiration on Friday saw the market rise on exceptionally high volume. Over the last 13 years high volume rises on an up op-ex day have often led to a selloff.

Could it be different this time? If it opens here then it already is. In no instance over the last 11 years did the market gap higher by as much as 0.5%. It did manage to do so on 12/21/98 – exactly 11 years ago. It also added to the gains and closed above the open that day. Overall implications appear short-term bearish though.

Wednesday, December 16, 2009

BKX Drops Ahead of the Fed

The banks got hit hard on Tuesday with the BKX falling nearly 3%. Below are results of the last 10 times the BKX dropped on the day before a Fed Day. Gains of 5% or more are highlighted in yellow.

Tuesday, December 15, 2009

Nasdaq Confirms S&P New High - Does It Matter?

Below is some research from last night's Subscriber Letter...

The S&P and Nasdaq set new closing highs Monday. They were the 1st closing highs since late November. Typically when the SPX breaks out to a new closing high after not making one for at least a couple of weeks, it leads to short-term follow through. I looked at this a few different ways – using both SPY and SPX and considering 50 and 200 day highs. All the results came out very similar. Below is one example.

I find it interesting that the while the breakout typically is accompanied by short-term follow through, it doesn’t carry over to the intermediate-term.

One thing I’m neglecting to look at in the above test is the fact that the Nasdaq also broke to a new closing high. Many traders might see this as “confirmation” of the S&P’s closing breakout. I decided to check and see how much difference the Nasdaq confirmation made.

These results are almost identical to the first test, though with a reduced sample size. I compared several ways and kept coming up with the same answer. The confirmation seems to be worthless. It neither greatly enhances nor greatly detracts from results. This holds true both short and intermediate-term. Frankly this was a bit surprising to me since we know a leading Nasdaq has been a good sign historically.

Monday, December 14, 2009

The Most Wonderful Tiiiiime Of The Yearrrrrrr

This week is options expiration. Over the last 25 years December options expiration week has been the most consistently positive week of the year for the SPX. Below I’ve updated and expanded the study from last December that looked at this phenomenon.

The bullish tendencies over the last 25 years have been exceptionally strong. And as we now see above, not only do you have strong indications that this upcoming week carries an upside edge, but also out as far as 3 weeks.

Friday, December 11, 2009

Poor Nasdaq Breadth A Bit Of A Downer

Below is one study that appeared in the Quantifinder last night. It suggests a bearish edge thanks primarily to the poor Nasdaq breadth on Thursday. I’ve updated the table from the 4/29/09 blog below.

I should note that while there appears to be a bit of a bearish edge, this study is faced with some conflicting bullish ones that I’ve discussed over the last few days in the Subscriber Letter. The outlook isn’t completely cut and dry. I did think the study was worth noting and updating though.

Tuesday, December 8, 2009

Does An Inside Day After An Outside Day Provide a Directional Edge?

After posting an outside day on Friday, the SPY followed up with an inside day on Monday. This was also noted by Scott Andrews of last night. I’ve recently become acquainted with Scott’s work and find his application of statistical analysis to trade gap fills very interesting. I ran some tests to see if the outside day / inside day combination provided any edge over the next few days.

The initial results looked like there was a possibility of a mild upside edge. Further investigation suggested the edge more likely is non-existent. Below is a profit curve that shows a 4-day exit strategy which should explain why I say this.

From this chart is appears that an edge MAY have been in place during the raging bull of the 1990’s. At that time just about any consolidation was followed by a strong move up. Since the end of 1999, though, the profit curve is a complete flatline. It appears that whatever edge there may have been back then is no longer in effect.

Monday, December 7, 2009

Back To Back Outside Days

Friday was the 2nd outside day in a row. Looking back to the inception of the SPY, other times there have been back to back outside days have typically been followed by rallies over the next few days. The study below illustrates this.

Friday, December 4, 2009

My Take On Optimal Position Sizing

A subscriber recently asked me about my take on position sizing, and more specifically using Optimal f. For those unfamiliar, Optimal f is a calculation derived by Ralph Vince which computes the optimal position size that would lead to a portfolio’s fastest growth rate. Mr. Vince has written several books on the subject and I do recommend his work.

Here's my take on using Optimal f (or any other position sizing formula for that matter).

Optimal f may be the mathematically optimal size for a position IF the trades are managed in an optimal manner. For many people, positions of "optimal" size feel aggressive. While our perception is often that we have a large edge on a particular trade or strategy, the edge often isn't THAT great. In order to maintain your edge you need to be able to trade the strategy in an "optimal" manner. Whether the strategy is automated or discretionary doesn't matter. You need to be able to take entries when they trigger. You need to be able to take exits when they trigger. But just as important and sometimes most difficult is you also need to be able to SIT when there is neither an entry nor an exit triggering.

The sitting can often be difficult when traders have what they perceive as a large position that they are managing. Many traders have a tendency to want to manage the trade more carefully with large positions. This may mean tightening stops sooner or taking partial profits a little quicker. Doing this "feels" good and it may get the trader to a breakeven level faster, but in the long run it will almost always either reduce or destroy the edge of the strategy. Tighter stops and quicker profit taking effectively means more losers and smaller winners. Few strategies can withstand more losers and smaller winners and still look good.

Optimal f may be the mathematical optimal size, but in my view the optimal size is the closest you can get to Optimal f and still execute your strategies as they were designed - while keeping your sanity.

Wednesday, December 2, 2009

Thoughts On Recent Gap Activity

A trader I know pointed out the unusually large gap activity lately. I track the 10-day absolute average gap over the 100-day absolute average gap on the charts page in the members section of the site. Meanwhile I observed the average true range is still below normal. I’ve copied the two charts from the website to illustrate.

The real odd behavior here is with the average gap size. Such gappy behavior is unusual with the market near new highs. It’s also unusual when there isn’t also a substantial increase in the intraday range. I looked at this a number of different ways last night. The 10/100 Absolute Avg Gap is 1.38 (meaning the 10ma is 38% larger than the 100ma of the overnight gap size). I looked at other instances where similar levels were approached and the market was near a new high. It’s been fairly unusual over the last 15 years and results were inconclusive.

I then look at comparing the size of the average gap to the size of the average intraday range (not the true range as shown above). Here again I found we are at very high levels but past history was choppy and inconclusive.

Lastly I looked at times where the 10-day average gap was well above normal and the 10-day average intraday range was well below normal. Again I could find nothing suggesting a significant directional edge.

So is this activity suggestive of anything? Perhaps. While the readings themselves don’t seem to help greatly in predicting direction, they do indicate some unusual behavior. My take is that the market is being influenced more by outside forces than is customary. It’s been noted by many that the dollar has been leading everything by the nose lately. Outside influences like Dubai debt have also had an overnight influence lately. This would seem to explain why such a large percentage of action is occurring overnight.

So what should we do about it as traders? Two things come to mind – 1) Be more cognizant of dollar and other intramarket action. 2) Perhaps don’t put quite as much weight on standard price, volume and breadth indicators as usual. The studies have done quite well as of late. Still, it may be worth trading with a bit more caution than usual until the stock market manages to decouple from the dollar a little bit.