Friday, December 30, 2011

NASDAQ's Astounding Performance on the Last Day of the Year

Last year in the 12/30/10 blog I showed that while the last day of the year used to be a bullish day for the market it seems to have changed over the last decade into a seasonally bearish day. I looked at performance across a number of indices last night and found the tendencies to be fairly consistent. Below is an updated equity curve for the NASDAQ Composite on the last day of the year. Its results easily stood out the most.

Closing up 29 years in a row is fairly astounding. Just as astounding is the abrupt end to the apparent edge. I am not yet ready to fully label the last day as bearish, but it should certainly no longer be considered bullish. I have no good explanation for why this may have changed, but it obviously has.

And that is something we always need to keep in mind. The market is constantly changing. It is important to always keep studying it, keep an open mind, and adapt as it evolves. Best to all in 2012! I hope it is a prosperous year for you and I hope Quantifiable Edges proves helpful along the way!

Thursday, December 29, 2011

QE Big Time Swing System 2011 Results Posted

I’ve updated the Quantifiable Edges Big Time Swing System overview page with results through December 28th. There is not a SPY trade currently open and based on the current market setup there is no chance of a trade triggering before year-end. I don’t update results that often since the system only trades about once per month on average.

The 2nd half of 2011 was a somewhat difficult period for those using the system to trade SPY. In August SPY suffered the worst losing trade in its history after it triggered long shortly before the US debt downgrade and market collapse. This 1 trade alone was responsible for an 8.26% loss. But even with the loss the Quantifiable Edges Big Time Swing System managed to finish the year with a small 0.25% gain for SPY traders (including dividends, commissions, interest, and compounding assumptions). This was certainly disappointing but in a tough year for the market, and with the SPY suffering it’s worst drawdown ever, it was nice to be able to finish in the black.

Traders who used the standard parameters and traded any of the other 29 ETFs that I discussed in the manual and have tracked for the last several years likely made out much better than this. Including SPY, the average return of the 30 ETFs was 11.54% and the median was 9.65%% (see assumptions in table). If you want to see stats for the full history of the 30 ETFs, that can be found on the Quantifiable Edges Big Time Swing overview page. I have listed 2011 trading results for all 30 ETFs in the table below.

You may have noticed that SPY shows a gain of just over 1% here.  The disparity between this 1% gain and the 0.25% gain shown on the overview page is primarily the dividends that had to be paid on short positions and the fact that it had to overcome a drawdown.  Most of the time the "raw" returns here will understate the compounded results.  That isn't the case this year for SPY.

As you can see, EEM was the star in 2011. It has done extremely well over the last 5 years. This is the 3rd year in the last 5 that is has returned over 33%, and all 5 years it gained better than 12.5%. This isn’t typical, though. EEM has been an especially strong performer.

For those looking for a system that they can use as a base to build their own system from, the Big Time Swing is an attractive option. It is all open-coded and comes complete with a substantial amount of background historical research. And since it is only in the market about ¼ of the time, it can easily be combined with other systems to provide greater efficiency of capital. Once you’re ready to try and improve the system yourself you can also refer to the system manual or the August 2010 purchaser-only webinar – both of which discuss numerous ideas for customization.

And if system development isn’t your thing, the Big Time Swing System provides easy to follow mechanical rules that you can follow. The standard parameters have performed quite well. There are only about 12 trades per year averaging 7 trading days per trade. All entries and exits are either at the open or the close. And to be sure you have everything set up properly traders may follow the private-purchasers only blog that shows all SPY signals and possible entry/exit levels. This service is free for 12 months from the date of purchase.

For more information and to see the updated overview sheet, click here.

If you’d like additional information about the system, or have questions, you may email BigTimeSwing @ Quantifiable (no spaces).

When SPX Drops Hard After A Steady Drift Higher

Wednesday’s selling followed a slow drift higher and wiped out a few days worth of gains. Below I show results of the 30 instances since 1982 where 3+ days of gains were erased after a rally of 5+ days.

These results appear to provide a solid upside edge over the next 1-10 days. In the past such-give backs after a steady rise have not suffered substantial additional selling. Instead they have often been followed by a resumption of the move up.

Thursday, December 22, 2011

'Twas 3 Nights Before Christmas (Nasdaq Version)

The last few years I have shown the "Twas 3 Nights Before Christmas" study along with results for the SPX.  It continues to do well.  But this year I decided to show results for the Nasdaq Composite.  As you'll see, the seasonality there has been even stronger and more reliable.

The stats in the table are stronger across the board, and the reliability shown at the bottom of the table is nothing short of incredible. Not all my studies are currently bullish, but based on this one I would expect to see at least a mild rise in the Nasdaq at some point in the next several days.

Wednesday, December 21, 2011

When 90% Down Days Are Followed By 90% Up Days

After seeing over 90% of the volume come to the downside on Monday, Tuesday registered a 90%+ upside volume day. A 90% down followed by a 90% up day is something that was never seen from 1970 – 2006. But this is the 10th time we’ve seen it happen since the beginning of 2007. Below I have listed the previous 9 and shown how the SPX has fared the following day.

Though instances are low statistics at this point appear solidly bearish, suggesting a possible 1-day downside edge. The high downside risk vs the small upside reward makes the results especially compelling for the bears.

Wednesday, December 14, 2011

Introducing the Quantifiable Edges Catapult Exit Designer

The Quantifiable Edges Capitualtive Breadth Indicator (more commonly known as the “CBI”) was introduced in just the 3rd blog post I ever did on January 6, 2008. The CBI was devised from a system I use to trade individual (primarily S&P 100) stocks and sometimes ETFs. I devised the system in 2005 and refer to it as my “Catapult” system. The Catapult was designed to take advantage of extreme (often capitulative) selling in these securities. The CBI reading is basically a count of the open Catapult triggers at any one time among S&P 100 stocks. What I noticed early on was that broad triggering of this system was frequently a sign that not only were these individual stocks primed for a bounce, but the market as a whole was also very likely to bounce. I have written an awful lot on the blog about edges that could be found by entering the market when the CBI reached certain levels. Traders that would like to examine any of that research more closely are always welcome to use the “CBI” label at the right hand side of the blog. It will pull up all associated posts.

In February 2008 I began the Quantifiable Edges Subscriber Letter. As part of the letter I included signals for my Catapult System. The success of the Catapult trades over the years has made it an attractive and somewhat popular feature for subscribers. I publish any signals that occur that night in the letter. Then using a limit order the next day I track them in the letter as well. When the exit signal occurs I also note this. The standard exit for a Catapult is at the open the day following the exit trigger. (On occasion I will send intraday updates alerting subscribers that the exit will trigger at a certain level and I am going to exit the trade at the close rather than waiting for the next day’s open.) While many subscribers have profited from the Catapult trades, there has been one common complaint.

The complaint is that since the Catapult is the one system on the site in which I do not reveal the entry and exit criteria it makes the trades uncomfortable for some traders. Not knowing when (or exactly how) the exit will come has prohibited some subscribers from ever entering these trades. They have instead watched many go by and found themselves a bit frustrated that they couldn’t take advantage without understanding the exit criteria. So I set about to solve this issue. Recently I released to subscribers the “Catapult Exit Designer” for Tradestation. The Catapult Exit Designer is open code that triggers entries as listed in the Subscriber letter over the last 4 years (over 250 trades) and allows the users to test their own exit criteria. It generates files for them with results of all trades. And for those subscribers that don’t use Tradestation, I show all the code and explain all the logic behind it so that you may easily transfer it to you preferred platform. In addition I provide sample exit strategies that would have produced results very similar to the actual Catapult exits.

The Catpult trades have done very well over the years. Of those that received fills and were tracked in the letter over 72% were winners, the average trade made 3.35% and the profit factor has been an impressive 3.32. What has most attracted me to this strategy is not just the fact that it has made money, but WHEN. Catapults generally trigger when the market gets scary. They happen when other systems and techniques I employ have sometimes struggled. So they have not only made me money, but they've done so when other methods were losing.  This was greatly useful in helping me to limit or avoid drawdowns. The timing of the trades can be seen in the chart below. The top of the chart shows the S&P 500. The indicator on the bottom is the CBI. One way I track catapult trades is by "clusters". A cluster of trades begins when the CBI moves above zero and it ends when the CBI returns back to zero. Historically I found over 90% of clusters would have been net winners had you taken all the trades in the cluster with equal size. (The last cluster that had a net loss was about 2 ½ years ago.) Above each cluster in the chart is a number. That number shows the net additive gains that would've been generated by that particular cluster.

(As an example to clarify, the latest cluster closed out in October. That cluster saw 8 Catapults get triggered and filled. They all were winners (not typical). The % gain for each was the following: 2.8%, 6.2%, 5.0%, 11.1%, 5.2%, 8.9%, 0.2%, and 0.3%. Add those numbers up and you get the 39.7% shown above the October cluster. That is what I mean by “additive gain”. It is NOT a portfolio return.)

This year all the trades have come in 4 big clusters. And they all came during sharp selloffs when other methods may have been under stress. I’d be happy to show years 2008 – 2010 but this post is already way too long. If you want to see those results you may use the link below. They are shown there.

The Catapult System has been a favorite of mine and of subscribers over the years. Hopefully with the new Catapult Exit Designer more people can begin to take advantage of the opportunities the Catapult System identifies. If you think there might be some tough times in 2012 and would like to implement a method that can possibly take advantage of them, then the Catapult System may be one option. Both the Catapult System triggers and the new Exit Designer are completely included in a Quantifiable Edges Gold Membership.

Tuesday, December 13, 2011

When BKX Drops Hard The Day Before A Fed Day

One sector that is especially sensitive to Fed Days is the banking sector (BKX). BKX closed down on Monday about 2.5%. The study below looks at drops of 2% or more on the day before a Fed Day, and how the BKX responded on the Fed Day.

Instances are a little low here but the stats are overwhelming. Below I have listed all instances.

Not shown in all the above stats is that the average run-up was 4.2% and the average drawdown just -0.6% during the Fed Day. Overall risk/reward appears strongly favorable for BKX based on the limited sample size.

Monday, December 12, 2011

The Mooost Wonderful Tiiiiiiime of the Yearrrrrrrrr!

Over several time horizons op-ex week in December has been the most bullish week of the year for the SPX. The positive seasonality actually has persisted for up to 3 weeks. I demonstrated this most recently in the the blog exactly a year ago. I’ve updated that study below to include last year’s stats.

The stats still appear extremely strong. I normally only show equity curves in my subscriber letter, but I'm in a good mood this morning, so below is a curve using a 5-day holding period.

Aside from the big pullback in 2000, it has been a strong steady move higher. This would seem to confirm the bullish edge.

Tuesday, December 6, 2011

The Nasdaq's Strong Tendency Under Similar Circumstances Over the Last Decade

Many people are aware that several higher closes during a downtrend will often suggest a downside edge. Few people realize how strong this tendency has been in the Nasdaq over the last decade, especially once the index has closed up 4 days in a row. With the Nasdaq now up exactly 4 days in a row as of Monday’s close, the study below is triggering.

Not only has the bearish tendency been strong and consistent, but it has persisted for as long as 2 weeks in most cases.

Are you wondering why the 50-day low filter is included?  Here's why:

Wednesday, November 30, 2011

2 Up Days After A 20-day Low The SPY Gaps Up 1%...

A quick study for you the morning...

Not much to go by, but perhaps some caution is warranted intraday. I also looked out over the next few days. They appear to be a tossup.

Monday, November 28, 2011

2% Gaps Up From 20-day Lows

With SPY looking to gap up over 2.5% this morning below is a quick look at all other instances since 2003 when SPY gapped up over 2% immediately following a 20-day low.

Low number of instances, but the suggestion is obvious.  I would note, though that although they all finished higher, they also saw some substantial pullbacks from the opening price.

Wednesday, November 23, 2011

When The Wednesday Prior To Thanksgiving Has Closed Lower

It appears the market is going to buck historical tendencies today and close down.  This will be the 11th time since 1960 that the SPX has closed lower on the Wednesday before Thanksgiving.  Below I have listed the other 10 instances along with the SPX performance on Friday (the day after Thanksgiving).

The 2 instances that I have circled are the only 2 where the SPX closed the Wednesday before Thanksgiving down over 1%.

For what it's worth I would note that statistics associated with these 10 instances (win %, profit factor, avg. gain, etc) are pretty much in line with all Fridays after Thanksgiving.  (It has generally been bullish.)

The Wednesday Before Thanksgiving

Thanksgiving has typically shown some pretty consistent seasonality.  Both the Wednesday before and the Friday after have exhibited bullish tendencies while the Monday after has been slightly bearish.  Last year I showed a table breaking it all down by day.  Today I decided to show a profit curve that represents simply owning the SPX from Tuesday's close through Wednesday's close.

Futures are down quite a bit this morning, so it may be difficult to keep this curve moving higher today, but over the years the next couple of days has been a pretty good bullish bet.  And when seasonality is this consistent it is often worth keeping in mind.

Monday, November 21, 2011

A 1% Gap Down from a 20-day Low

The SPY finished at a 20-day low on Friday, and now it is gapping down large this morning. I ran a test to see what kind of intraday edge this might suggest.

The raw numbers appears to suggest a mild intraday upside edge. But take a look at the profit curve.

This curve does not get me excited about buying into this gap down. Instead I will need to see more compelling evidence in order to anticipate an intraday move higher.

Thursday, November 17, 2011

Vegas Traders Expo

I am at the excellent Las Vegas Traders Expo for the next few days.  I plan on seeing several presentations and will be speaking myself on Saturday.  I'd love to meet some blog readers, so please come introduce yourself if you see me. 

More information here:

And here's the info on my presentation:

Tuesday, November 15, 2011

Low Volume A Possible Concern

Monday’s extremely low volume could be a short-term bearish sign. The 0.96% drop did not quite qualify for this 2008 study, but below is another past study that does exemplify the low-volume issue. Rather than index volume, it uses SPY volume. Either one would yield similar results in this case.

While not the most overwhelming edge we’ve ever seen, it does seem to strongly suggest that caution is warranted.

Friday, November 11, 2011

Veterans Day Performance

Veterans Day is one of the few US holidays when the bond market is closed and the stock market is open. Columbus Day is another. But while Columbus Day has exhibited some quantifiable edges, Veterans Day has not. Veterans Day is celebrated on November 11th (or the closest weekday to November 11th) each year. For a brief period from 1971 – 1977 it was celebrated on the 4th Friday of October. Below is a profit curve that shows how Veterans Day has performed over the years.

While for a good long while it appeared Veterans Day may provide an upside edge, the curve topped out in 1992. Since then it has been mostly lower. Happy Veterans Day and thanks to all veterans!

Thursday, November 10, 2011

Large Gaps Up After 3% Drops

With the market set to gap up 1%+ this morning I decided to look at other times a 3% drop was followed by a 1% gap up. Below I have listed all 10 instances along with their intraday performance.

Though the numbers don’t suggest a statistically significant edge, the early indications appear to suggest a tendency for further upside by the close. It is interesting that the avg run-up and avg drawdown are both about 2.8%. So traders could consider playing the intraday oscillations rather than taking a directional bet right off the bat.

Monday, November 7, 2011

Why Inside Days No Longer Get Me Down

SPY failed to make either a higher high or a lower low than the day before. This is often referred to as an “inside day” because the range was completely inside the previous day’s range. In the past I have shown how inside days under the 200ma have often been followed by moves lower. What’s interesting is that while that held true for a long time, since the bottom in 2009 it has not been the case. Let’s first look at an updated results table based on this setup.

As you can see the statistics still appear bearish, with the downside edge basically playing out over the 1st 3 days.  But now let’s take a look at the profit curve.

As you can see over the last two years (and 15 or so instances) the setup has not provided a downside edge.  Both the 1-day and 2-day profit curves looked very similar to this. 

It is important to understand when historical instances provide a directional edge.  But the market is always evolving.  And sometimes setups that provided an edge for a long time will either stop working or will go a period of time without demonstrating the same tendency.  It is important to monitor not only how has a setup performed over the long term, but also keep an eye on recent instances to ensure that edge is still being provided.  In this case it doesn’t seem to be.

Wednesday, November 2, 2011

Fed Days After Large Drops

While Fed Days have historically provided an upside edge, that edge has been substantially more powerful when there has been strong selling the day before. The last time I showed this study on the blog was 4/28/10. I've updated the statistics below.

Instances are a bit low, but they couldn’t get much more bullish. With a profit factor over 11 and the average trade about as positive as the worst trade was negative, risk/reward appears to heavily favor the bulls.

With the makret gapping up large this morning it may be too late to take advantage of this one. I did send a Tweet yesterday afternoon linking to the Fed Day studies where astute readers would have found this study posted in April of 2010. If you would like to follow me on Twitter you may do so at

Monday, October 31, 2011

When Stock Prices and Bond Yields Are Both Hitting New 50-Day Highs

The fact that the 10-year bond rates hit new highs on Thursday along with the SPX is notable. The study below is one I’ve published in the subscriber letter before.

Generally it seems that higher interest rates have often made bonds an attractive investment. This may lead people to forsake stocks in favor of lower risk returns with improved yield. (Not sure this will be the case this time with yields still so low.) Implications of this study appear to be longer-term in nature than we usually see. To help visualize how this edge has played out over time I have pasted the equity curve using a 50-day exit strategy.

This one looks very similar to the 20-day exit strategy. In this case the downside edge didn't begin to exert itself until the 1970s but it too has persisted lower for a long time.

Tuesday, October 25, 2011

Very Low SPY Volume At A New Intermediate-Term High

SPY volume came in at the lowest level in over a month on Monday. Very low SPY volume when the market is at or near highs is often a bearish sign. A few studies related to this appeared in the Quantifinder this evening. I decided to examine the combination of a 20-day low in volume combined with a 50-day high in price.

Over the next 2 to 3 days there appears to be a solid downside edge based on the numbers. While I expected this to be the case, I was somewhat surprised to see that the edge persisted well beyond that. While I frequently show profit curves in the Subscriber Letter, I rarely do so on the blog. Today I decided to show it. So here it is using a 2-day holding period.

The consistently down sloping curve appears as impressive as the numbers.

Thursday, October 20, 2011

Why I Still Look At FTDs & What Happens When A 1% Drop Follows One

I received a note the other day from a reader who asked why I have so many studies related to Follow Through Days (FTD) on the blog. The reader mentioned that the edges often provided by FTDs are not as compelling as many of my other studies. But one man’s trash is another man’s treasure. And while FTDs may not work as advertised and accurately predict new stock market rallies, they do a very nice job of defining the environment. A FTD tells us the market has undergone a correction. It tells us the market has made a multi-day move off the bottom. And it tells us that strong volume and price action have come into the market. Enthusiasm is picking up.

We understand that the rally is only going to succeed about 40%-50% of the time based on the FTD, but we don’t need to know right away whether it is going to succeed or not to make good use of the information. While many of the past FTD studies on the blog and in the Subscriber Letter have focused on action on and around FTDs and what that might mean for the intermediate-term, it can also be useful to simply put the current day’s action in proper context so that we may better understand what that action may imply over the next few days and weeks. I use context in many other ways and people hardly notice anymore. Studies are always framed by where the market is. Is it above or below the 200ma? At a 20-day high? At a 20-day low? These are all helpful, but recent work has led me to believe that FTDs can be just as useful in defining context, if not more so. So I’ll continue to incorporate them and am optimistic that doing so may uncover some real gems. Anyway…we had a FTD Tuesday and then Wednesday the market sold off strongly. Strong enthusiasm has quickly turned. Let’s look at other instances and what has followed.

The number of trades is a bit low, but the early indications appear to strongly favor another day of selling. Two things really strike me here. 1) There hasn’t been an instance in over 10 years. 2) Run-up/drawdown is heavily skewed in favor of the bears. Overall I find these results compelling enough to take under consideration.

Wednesday, October 19, 2011

When FTDs Occur In Conjunction With 20-Day Highs

I discussed the other day that there has never been a Follow Through Day (FTD) that occurred AFTER a new 50-day high. There has also never been a FTD that occurred in conjunction with a new 50-day high. These things changed on Tuesday since the move up was also accompanied by an increase in volume. But there have been some FTDs that occurred in conjunction with 20-day highs. Below is a new study that shows how they fared.

Results here are impressive over both the short and intermediate-term. To get a better feel for the short-term returns I have listed the instances below.

The run-up to drawdown ratio here is quite impressive. I’ll also note that 7 of the 10 instances went on to have “successful” rallies. (“Success” means it either hit a new 200-day high or at least rose 2x as much as it had already risen off the bottom.) The 3 instances whose rallies did not succeed (circled in red) all saw run-ups of at least 2% before they eventually rolled over and made new lows.

More information on FTDs may be found here.
Positive aspects to this one include the strong breadth and the fact that it came after day 10.
Some obstacles to success include the fact that it is occurring under the 200ma and it is occurring after a substantial market decline.

Monday, October 17, 2011

This is the 1st Time SPX Has Rallied to a 50-day High Without One of These

One of the more amazing things I’ve noticed about the rally over the last 2 weeks is that it has come without any 1% Follow Through Day (FTD) on rising volume. Investors’ Business Daily first published and popularized the concept of the Follow Through Day (FTD). Though they have changed the definition slightly over the years, I have found their original definition to be useful in several studies. My tests go back to 1971, which was the inception of the Nasdaq, and also as far as some of my volume data goes. Since that time there has never been a rally that has taken the SPX from a drawdown of at least 8% to a new 50-day high that was not inclusive of a FTD – until Friday.

This puts this rally in uncharted territory, which is always a little bit of an uncomfortable place for me. A FTD could still occur, and just because we have had a strong 9-day rally does not mean a bull market has already been missed. But one purpose of the FTD concept is to help in identifying market bottoms. If we are already at a 50-day high, then I would say this is one case where the FTD has let traders down in try to identify that bottom.

Note: There was a 1% FTD in the Russell 2000 last week.  I do not look at the Russell 2000 for FTD purposes.  My studies have always looked at the Dow, Nasdaq, and SPX.  The Nasdaq goes back to 1971, and I wanted to be sure to include that index initially.  The Russell only has history back to the mid-80s.  I feel consistency is important when testing and therefore I only look at those 3.  IBD and others may sometimes look at additional indices.  For consistency in testing, I don't.  And this is the 1st rally where none of those 3 have registered the FTD before hitting a 50-day high.

Friday, October 14, 2011

The Incredible Shrinking VXO

The VXO has dropped very strongly over the last week and a half. On Thursday for the 2nd day in a row it closed more than 20% below its 10ma. Looking back to 1986 I was only able to find 3 other instances where this occurred. While it’s dangerous to draw solid conclusions from just 3 instances I decided to show them below:

It hasn’t happened in about 21 years, which makes the setup even more questionable, but the run-up / drawdown stats were so lopsided I thought it was worth pointing out. Over the next 2 days the instances all saw a drawdown between 2.1% - 3.8%. Only 1 instance saw any run-up, and it was just 1.6%. (We’ll be testing that at the open.)

Wednesday, October 12, 2011

What Tuesday's Tight Range Implies

I’m starting to see a number of indications that the market is ripe for a pullback. One indication I noticed yesterday that will often suggest a pullback was the extremely tight range. Tight range can be a sign of indecision. When it occurs with the market extended upwards it can also imply the bulls are running out of gas and likely to step back for at least a short time. The study below demonstrates this concept.

Much of the edge here is realized within the 1st 2 days. If the market is going to act on this signal and flounder  it will often do so rather quickly.

Monday, October 10, 2011

A Columbus Day Tendency

While the stock market is open on Monday, banks, schools, government offices, and the bond market are closed. In past years with the bond market closed, the stock market has done quite well on Columbus Day. Of course the most famous Columbus Day rally was in 2008 when the market gained over 11% after having crashed the week before. Last year I showed that positive momentum leading up to Columbus Day has generally led to a positive Columbus Day. Columbus Day has been celebrated on the 2nd Monday of October since 1971. Below is an updated version of last year’s study.

I’ve circled some of the more impressive stats here. With 75% of trades profitable and winners nearly twice the size of losers risk/reward has been very favorable.

Friday, October 7, 2011

Why Shorting In This Environment Can Be Dangerous

One of the most important and largely ignored aspects of market analysis is putting the pattern or indicator readings you are examining into proper context. Is the market in an uptrend? A downtrend? At new highs? At new lows? It can make a big difference in how the market will react to setups.

Currently the SPX is bouncing strongly off of an intermediate-term bottom. Initial thrusts from bottoms are often much riskier to short than similar thrusts in downtrends that don’t originate off a bottom. I’ve shown many examples of this in the Quantifiable Edges Subscriber Letter. Below is an example that simply looks at 3-day rallies in downtrends. The 1st set of results looks at times where the rally originated from somewhere other than a 50-day low. The 2nd set require a 50-day low.

Here’s the 1st set:

Results here appear solidly bearish.

Now let’s look a times like the present where the market is emerging from an intermediate-term low.

These results appear to be a polar opposite of the previous set. It has been quite a hot streak since 2001 with these setups. Prior to that no edge was evident in either direction, but it still wasn’t bearish like the 1st setup.

Always keep context in mind, and don’t get too aggressive shorting thrusts off bottoms.

Tuesday, October 4, 2011

A Turnaround Tuesday Scenario

Tuesday happens to be the most likely day of the week for a turnaround.  I first examined this in the 1/13/09 blog.  With the last 2 days being heavily lopsided to the downside the odds of a turnaround on Tuesday are even higher.  This is demonstrated in the study below.

All the stats heavily favor a rally on Tuesday, and if not Tuesday, then Wednesday.  Perhaps the bulls can win a day or two here. 

Of course the current environment is a bit more extreme than most of the sample...

Monday, October 3, 2011

Beginning of Month Effect In Uptrends Vs. Downtrends

Monday is the 1st trading day of the month. The 1st trading day of the month is renowned for having a bullish tendency, and this has been the case since the late 80s. But this tendency has primarily played out during uptrending markets. During down times the 1st of the month has not been particularly bullish. This was illustrated quite nicely by my friend and fellow market analyst, Tom McClellan, in his “Chart in Focus” column on Friday. Using the 200ma as our measure of uptrend versus downtrend, I will demonstrate this concept numerically below.

This first study shows results since 1988 of committing $100k per trade on the 1st of the month if the SPX is trading above its 200ma.

The numbers all look very solid. About 2/3 of the trades were winners, and the winners were about 1.5 times the size of the losers, making for a profit factor of over 2.5.

Next let’s look at times like now when the SPX is below its 200ma.

The numbers here net out to a positive number, but just barely. It certainly doesn’t appear to be anything you would want to base a trade on.

Thursday, September 29, 2011

Large Gaps Up After Very Large Down Days

In my last post I looked at how SPY has performed from open to close when a 2% gain was followed by a gap up of at least 1%.  Today we are seeing another 1% gap up, but this time it is on the heels of a 2% loss.  So I thought it would be interesting to examine this scenario.  Results of the last test suggested the open to close action favored a move lower, which is what played out on Tuesday.  Below is the general stats for setups like today.

Not a ton of instances.  At this point we can see what appears to be a moderate upside edge.  Let's take a look at the list of instances to see if we can learn anything more.

Most striking to me here is that there was not a single instance that closed within 1.5% of its open.  Volatility after the bell was huge.  Traders looking for intraday moves should have plenty of action today.

Tuesday, September 27, 2011

Large Gaps After Large Up Days

SPY is gapping up large this morning after rising 2.3% yesterday.  Below is a study showing how SPY has performed intraday under similar circumstances over the last 8 years.

Based on other gap studies we have seen, the negative results are no surprise.  Traders may want to be careful of chasing long entries at the open.

Monday, September 26, 2011

Some Potentially Bearish Inside (Day) Information

I’ve shown before that inside days in long-term downtrends are often short-term bearish. (An inside day is a day like Friday where the market makes a higher low and a lower high than the day before.) So what if that inside day closes higher and comes immediately after a 20-day low like we are seeing now?

Instances are a little low but initial results here appear quite bearish. As I note below the chart I also included a column showing the max losing trade. While it is very large, it was not just one outlier, but 3 extra large decliners that cause the average trade to look so weak. Note though that even 2 days out, prior to the extra large declines taking place, the edge still appeared fairly bearish.

Of course the market appears ready to gap up big this morning. There is certainly the possibility that a large gap up could trigger a short-selling rally which would run overrun the inclinations of this study.

Tuesday, September 20, 2011

Fed Days During the Weakest Week

Yesterday I mentioned that the week post op-ex in September has historically been the worst week of the year for stocks. I also showed a chart. Later a reader sent the following comment, “Thanks for this Rob, I'm enjoying going through your FED Days book. Seeing as we're in a week with an FOMC meeting, which you show has historically strong performance prior to the meeting does this study include the FED days effect?”

For those who may not be aware, Fed Days have had a strong bullish tendency over the years, but as I mentioned last night, this has historically been the most bearish week of the year. Below I have listed all Fed Days that have fallen during this week in September.

There have only been 11 instances, and I don't see a substantial edge in either direction. Returns are lower than with a typical Fed Day, but not so much that it will change my approach. So rather than worrying about the week, I will apply some of the other filters I’ve used before when considering Fed Day edges.

Several Fed Day edges may be found using the Fed Study label on the blog.

A more comprehensive look is available in The Quantifiable Edges Guide to Fed Days.

Monday, September 19, 2011

The Weakest Week

The week following September options expiration has historically been the most bearish week of the year. I showed some detailed stats in my weekend report, but below is a graphic that shows how consistently weak this week has been.

Seasonality is not normally a reason to sell on its own. When combined with a long-term downtrend and a short-term overbought market, it can often provide a pretty good signal.

Wednesday, September 14, 2011

Long-Term % Change Charts of XIV and VXX

I saw the other day that UBS is launching 12 new VIX-based ETFs. Today I thought I’d show some interesting charts of VXX (IPath short-term VIX) and XIV (VelocityShares Inverse VIX short-term). These are not run by UBS, but they do use a similar approach to the UBS ETFs that are coming out.

Trading volatility can be exciting and there are some terrific swings available for short-term traders. Just Friday VXX rose 9.5%. But if you think these ETFs may be suitable buy-and-hold vehicles, the charts below may change your mind.

The 1st chart is a % change chart of XIV, the inverse VIX vehicle. It goes from the 11/30/10 inception through 9/9/11. After 6 months or so it began garnering some major attention and there were lots of articles written about it. And rightly so, since it posted gains of over 100%...

…but if you had bought at the inception and held through 9/9 you would have seen your investment rise by over 100% and then lose all its profits and now be down over 30%. That isn’t a pleasant ride. (Also interesting is that XIV did a 10-1 split in June when shares were near $170.)

Now let’s look at VXX. VXX has risen over 125% since hitting its low in early July. But let’s look at a % change chart over the same time frame as XIV to see how it has done during the last 10 months or so.

Even with the massive rally since July, an investment made on 11/30/10 would be down 7%. And if we go back to VXX inception?

The massive 2-month rally doesn’t look like much on this chart. Since VXX’s inception in 2/2009 it is down about 89% despite more than doubling in the last 2 months.

Some of the reason for the long-term failure of these ETNs is due to expenses, but much of it is thanks to the impact of backwardation and contango when they do daily rolls, as well as the mathematical difficulties in overcoming large drawdowns. (A 50% loss needs a 100% gain to break even. A 75% loss needs a 300% gain…)

I won’t get into backwardation/contango issues here, but below I have listed a few places you could learn more. The bottom line is that these products can be terrific trading vehicles, but 1) you need to understand them and 2) as I hope was clearly demonstrated in the charts above, buy and hold is typically not a good strategy.

Other sources of information:
I did a series of webinars for Quantifiable Edges subscribers on our members site a few months ago that explain backwardation and contango in detail and how they relate to these products. They are archived on the "Videos" page of the members site and the first one of these is even available to trial members. (Click here for trial subscription.)

Another good source of information is Bill Luby’s VIX and More site. Below are a couple of links to posts on his site that will get you started.

Tuesday, September 13, 2011

Performance After SPX and VIX Both Close Higher on a Monday

The SPX and the VIX typically trade counter to each other, so it's a little unusual to see them both close higher as they did yesterday. It does happen from time to time, and Monday is the most common day of the week for it to occur. This is because the VIX has a natural tendency to rise on Mondays. Even so, when it has occurred on Mondays it has typically suggested a short-term downside edge. The edge is more pronounced and lasts longer when the SPX is trading below its 200ma. Below are the numbers.

As you can see, the statistics suggest a downside edge over the next few days.

Friday, September 9, 2011

When Big Drops Come After Bigger Gains

When the market experiences a strong pullback as it did yesterday then there is often a tendency for it to bounce the next day.  This tendency varies greatly though, and depends on a large number of factors.  One factor to consider is how the market moved the day before.  Let’s look at a couple of equity curves that will demonstrate my point.  This first one shows results since 2003 of buying all 1% drops at the close and selling at the close the next day.

I ran this back to 2003 because that is about the time this equity curve began to show a consistent upside tendency.  Now let’s look at all times the big drop failed to close the SPX below the close of 2 days ago.

There’s different ways to look at this, but here is a simple one.  If today’s big drop did not wipe out yesterday’s gains, then it may have further to go.