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: