January Opex Struggles

Opex week in January is one that the market has seen some struggles over the last 18 years. Below is the list of January op-ex weeks from 1999 – 2016 with their full week performance results. There have been 7 years in which January op-ex week occurred in conjunction with Martin Luther King Day. These were 4-day weeks and they are denoted with blue boxes around them.

2017-01-16

There has been a decided downside tendency during January opex week over the last 18 years. The run-up / drawdown stats are especially notable. Traders may want to keep this in mind this upcoming week.

 

 

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Why Today’s Fed Day Does Not Appear Bullish As Usual

Wednesday is a Fed Day. Fed Days have historically shown an upside tendency. I have documented this tendency in great detail over the years, with the most complete documentation coming in The Quantifiable Edges Guide to Fed Days. Based on what the market did Tuesday, this does not seem to be the most favorable Fed Day setup. A big reason for this is that SPX closed at a 20-day high on Tuesday. Fed Day bullishness has often occurred when a Fed announcement has helped to alleviate market stress. When the market closes at a 20-day high, it typically means there isn’t a lot of worry present. Under these circumstances, the upside inclination has also not been present. This can be seen in the study below.
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Neither the stats table nor the profit curve suggest any consistency or tradable edge.

As a comparison, here is a profit curve of all Fed Days when SPX did NOT close at a 20-day high the day before.

2016-12-14-3

 

 

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The… Most… Wonderful… Weeeeek… Of…The… Yeeeaaaarrrrr!!

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’ve shown the study below in the blog many times since 2008. It looks back to 1984, which was the first year that SPX options traded. The table is updated again this year.

 

2016-12-12

 

The stats here remain extremely strong. Have a wonderful (and bullish?) December Opex Week!

 

 

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Thanksgiving Week Edges

The time around Thanksgiving has shown some strong tendencies over the years – both bullish and bearish. In the table below I show SPX performance results based on the day of the week around Thanksgiving. The bottom row is the Monday of Thanksgiving week. The top row is the Monday after Thanksgiving.

 

ThanksgivingWeek

 

Monday and Tuesday of Thanksgiving week do not show a strong, consistent edge. But the data for both Wednesday and Friday looks quite strong. Both of those days have seen the S&P 500 rise over 70% if the time between 1960 – 2015. The average instance managed to gain about 0.3% for each of the 2 days. (This is shown in the last column “Avg Trade where $300 would equal a 0.3% gain.) That is a hearty 1-day move. Meanwhile, the Monday after Thanksgiving has given back over half the gains that the previous 2 days accumulated. It has declined 64% of the time and the average Monday after Thanksgiving saw a net loss of 0.37%.

 

Of course I am not the first person to notice this. Strong Thanksgiving seasonality has been noted by many analysts over the years. So one (valid) concern that traders have with well-known seasonal tendencies is that they can be easily front-run. If people know there is a good chance that the market will rise Wednesday through Friday, they will look to get long on Tuesday. And if all the people buy ahead of the bullish period, then that may either dilute or eliminate the seasonal edge.

 

From 1960 – 1986 someone who bought Tuesday’s close and sold Friday’s close would have seen the SPX decline only 1 time. But from 1987 – 2015 there were 8 instances where SPX did not close higher on Friday than it did on Tuesday. So perhaps the edge became so well known that it was diluted by front-running.

 

To determine whether the Wednesday – Friday Thanksgiving edge may have been front-run a particular year, you could examine price action. I have repeatedly found that a market that is oversold going into a strong seasonal period will perform better than a market that is overbought going into a strong seasonal period. A very simple metric that could be used in this case would be to see whether the market closed in the top or bottom half of its intraday range on Tuesday of Thanksgiving week. To do this I used SPY instead of SPX, because it had better intraday data.

 

Since 1993, I found that years in which SPY closed in the top half of its intraday range on Thanksgiving Tuesday posted a 7-5 record from Tuesday’s close to Friday’s close. When SPY closed in the bottom half of its range on Tuesday the performance over Wednesday to Friday was 10-1. And the average instance posted a 0.8% gain these years versus a 0.1% average gain the other years. So Tuesday’s action appears worth watching as we approach this potentially seasonally bullish period.

 

 

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Twenty-Day Lows Ahead of Turnaround Tuesday

Tuesday’s have a well-earned reputation for being days where bounces tend to begin. The study below is from last night’s letter. It was also shown in the Quantifinder yesterday afternoon. It examined other times that the SPX closed at a 20-day low on a Monday. Results have been updated.

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Stats here appear strongly bullish. It is also worth noting that since 2013 there have been 9 winning trades in a row (when looking out 4 days). Traders may want to keep this in mind over the next few days.

 

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October Opex Week Has Historically Been Bullish

From a seasonal standpoint option expiration week is often a pretty good week for the market. October is one of those months where it has been especially good over the years. The study below examines performance during October op-ex week.

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I decided to exclude 2008 because action that week was such an incredible outlier that it greatly skewed all the stats. (The week started with an 11.5% gain on Monday of 2008.) Results 1-4 days out look pretty solid. So the bulls appear to have some seasonal forces on their side this week.
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The Weakest Week Is Back

From a seasonality standpoint, there isn’t a more reliable time of the year to have a selloff than this week. In the past I have referred to is as “The Weakest Week”. Since 1961 the week following the 3rd Friday in September has produced the most bearish results of any week. Below is a graphic to show how this upcoming week has played out over time.

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As you can see the bearish tendency has been pretty consistent over the last 55 years. There was a stretch in the late 80’s where there was a series of mild up years. Since 1990 it has been pretty much all downhill. Below is a table showing results of buying Sept. op-ex Friday and then selling X days later from 1990 – 2015.

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The consistency and net results appear quite strong. I note the only instance that didn’t post a lower close at some point during the following week was in 2001. And the 9/11 attacks certainly made for unusual circumstances that year.

 

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Sharp Decline in VXO and the New Market Environment

Yesterday I showed a VIX-related study that suggested it was so stretched to the upside that the market was likely to get a quick bounce. And we certainly got one on Monday. The VIX is a measure of options pricing and is often referred to as a “fear index”. It saw a 13% drop on Monday. Meanwhile, the VXO, which is the old calculation of the VIX declined nearly 23%. Such big declines often suggest short-term over-optimism on the part of traders and are followed by a dip the next day. This can be seen in the study below.

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Numbers here suggest a downside edge for Tuesday. I’ll note that there are some other studies I am seeing that show short-term bullish inclinations. But the way the VIX and VXO are jumping around, we certainly seem to have entered an emotional, reactive market environment. Such environments can be prone to whippy action. Traders should anticipate a market that is much different than the quiet, tight ranges we experienced from mid-July through early September.

 

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What The VIX Spike Is Suggesting For The Next Few Days

Friday’s big drop was accompanied by a big spike in options prices as measured by the VIX. The VIX rose so sharply that it closed Friday 32% above its 10-day moving average. The study below examines stretches of 25% or more, and how the SPX has performed in the following days.

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Very impressive consistency. Sizable bounces seem to have been the norm under these circumstances. There seems to be a decent chance of a bounce in the next few days – and this is not the only study I examined this weekend that is suggesting that.
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Tight Consolidations After New Highs

The range over the last week has been extremely tight. On 7/20/16 SPY closed at a 50-day high. Every SPY close in the 5 days since 7/20 has been within the intraday range of that 7/20/16 bar. (And it wasn’t even that big of a range.) It is said that consolidations are often resolved in the direction of the trend. This guideline suggests that we’re more likely to see another leg up from here than a breakdown. The study below tests this concept.

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It certainly appears to confirm the old technical adage. Results favor the long side over the immediate 3-day period and they are even more impressive when looking out 8 to 10 days.

 

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An Extremely Quick Move From A 50-Day Low To A 50-Day High

Remarkable about Friday’s 50-day high close is that it came just 8 trading days after SPX closed at a 50-day low. That’s quite rare to see. The study below is from this weekend’s Quantifiable Edges Subscriber Letter. It looks at all the instances since 1950 of a move from a 50-day closing low to a 50-day closing high that have occurred within 2 weeks.

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There have only been 7 occurrences but the stats are overwhelmingly bullish over the next month. The profit maxes out on day 17 in the table above. To getting a better feel for the instances I have listed them all below along with 17-day stats.

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While 7 instances is a bit low, the results are unanimous and the stats above are incredibly lopsided. So it seems this study may be worth some consideration. The average run-up of the 7 instances is over 5x the size of the average drawdown, and every instance saw a run-up substantially larger than its drawdown. That’s impressive.

 

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Intraday Performance After A Massive Gap Down

As I write this in the middle of the night, the S&P 500 futures are down between 4% – 5%. A 4% gap down for the SPY is very rare. Below is a list of all other times it has happened since its inception in 1993.

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It does not appear as though panic selling at the open would be wise. There seems to be a strong upside edge for this one day. Of course the sample size is low and anything could happen in such a highly charged environment.  But this study certainly suggests an upside edge should a 4% gap down actually materialize.

 

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5-Day Declines That Remain Above 20-day lows

(Note – the table below was corrected from an earlier post.)

Wednesday marked the 5th day in a row that SPX closed lower. The study below was noted yesterday afternoon by the Quantifinder. It examines 5 lower closes above the 200ma and also above a 20-day low. All results are updated.

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Based on the stats table there appears to be a bullish inclination, especially over the first 2-3 days. I have actually seen a large number of studies the last couple of days suggesting a bounce is likely. To this point those studies have not mattered. At some point they will, but the market environment appears a bit more dangerous than usual. Still, from what I am seeing, there certainly appears to be a strong chance at a bounce in the coming days.

 
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Sharp Drops From Intermediate-Term Highs – A Short Term Bullish Setup

Thursday and Friday saw relatively large selloffs in SPX. After closing at a 50-day high on Wednesday it closed at a 10-day low on Friday. This triggered an interesting study from the Quantifinder that looked at relatively sharp selloffs that made at least 8-day lows. I have updated that study below.

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The stats all suggest an upside edge over the next 1-5 days. Traders may want to keep this in mind when setting their trading bias this week.

 

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