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.

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.

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.

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 1^st profitable close after entry then 18 of 21 trades would have been winners within 2 days and 20 of 21 within 5 days.

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.

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.

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.)

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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.)