An $SPX Sector Breakdown & Visual Of The Rubber-Band Effect

Below are the nine S&P 500 sector ETFs and their performance for the 14 days heading into the December 24th market bottom, and then their performance for the 14 days since.

2019-01-16

As you can see, the sectors that were stretched the farthest to the downside have bounced the highest to the upside. The sectors that held up a little better during the selling have not had nearly the same bounce. This is typical of a market coming off a V-bottom. This does not mean the groups that have bounced the most to this point are the ones that are most capable of leading a new bull market. Those potential leaders are yet to be determined. It simply shows the rubber-band effect off the deeply oversold low.

 

 

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Historical View Of Extreme Short-Term Gains In $OEX Components

As I write this around 11am EST both NFLX and CELG are threatening to close up > 50% from their December 24th closing price, just 14 trading days ago. While that sometimes happens with speculative smallcap stocks, it is very unusual to see a largecap S&P 100 stock accomplish such strong gains in such a short period of time. In fact, the last instance of a 50% close to close gain within 15 days for an S&P 100 stock occurred in 2009.  I looked back at other times since 2000 where it has occurred among S&P 100 components, and found only 38 occurrences. Below is the complete list.

2019-01-15

Note I used Norgate data to do the research. Stocks with numbers after the ticker are no longer traded. My basic observation about these instances are the following:
• It almost never happens except during extreme market conditions, and often during, or just after, a bear market.
• The common themes were Financials in 2008-09 and Tech in 2001-02, which were the hardest hit and most volatile groups of their time.
• Returns going forward appear bunched and inconsistent.

To further illustrate the last point, below are the summary forward returns for all 38 instances.

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I don’t see a strong and consistent edge among suggested. I do find it interesting that we have two stocks threatening to accomplish the rare feat today.

 

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January Opex Weak

Opex week overall has typically been a bullish part of the month for the market. But over the last 20 years, January has been a major exception to this rule. The table below shows results of buying the Friday before options expiration week in January and then selling at the close of option expiration Friday, which is the 3rd Friday of the month.

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15 of the last 20 January opex weeks have closed down. And the average January opex week lost about 1%. The max run-up during the week was about 0.8%, while the average drawdown during the same period was about 3x that, at 2.2%. And the stats are all this poor despite last year posting the 2nd strongest up move on a January opex week over the 20-year sample. Here is a chart that shows how the edge has played out over time.

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January opex is not only poor when comparing against other opex weeks, it is extremely poor overall. Looking at all week/month combinations back to 1999, the only week that has shown greater losses is the week after opex week in September. In other words, January opex week has been the 2nd worst week of the year over the last 20 years.

 

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Rare Zweig Breadth Thrust Signal Suggests Bullish Implications

The strong breadth we have seen recently has caused the 10-day exponential moving average of the NYSE Up Issues % to rise up to 62%. A move through 61.5% after being below 40% within the last 2 weeks is considered a Zweig Breadth Thrust trigger. This is a signal created by Martin Zweig. Over the long haul it has been a rare but powerful signal. Below is a list of all signals since 1970 along with their 20-day returns (using Tradestation data).

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All 8 instances saw a runup of at least 3% over the next 4 weeks, and only once did the market pull back as much as even 2.5%. I last showed this study on the blog in 2015. Today I decided to show SPX charts for all the signals. I have labeled the 20-day holding periods shown above on the charts as well.

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I am seeing some other evidence suggesting a possible pullback in the next few days. But the Zweig Thrust Signal certainly favors the bulls for both the short and intermediate-term. Traders may want to keep it in mind as they determine their trading bias.

 

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After A New Year Starts On A Good Note

Last night’s subscriber letter featured (an expanded version of) the following study, which looks at performance in the 1st couple of days following a positive 1st day of a new year.

2019-01-03

The stats and curve all suggest some immediate follow-through has been typical. There have now been 10 winners in a row, with the last loser occurring in 1998. Also notable is that 26 of the 28 instances (93%) closed higher than the entry price on either day 1 or day 2. Interestingly, the 2 instances that didn’t, also didn’t manage to post a close above the entry price at any point during the rest of the month. Of course AAPL has already put the market in a bit of a hole, with SPY prepping to gap down over 1% as I type this.  So it may be more of a challenge to close up today or tomorrow than usual.

It is also notable that many instances saw a mid-month decline after the initial bounce, but that has not played out in recent times.

 

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Last Day Of 2018 – Should You Sell A Little Early?

In the subscriber letter over the weekend (and for the last several years) I showed some studies that examined market performance in the last 15 minutes of trading for the year. The table below is from those studies – also seen here on the blog in 2015. Stats are updated and it shows all “last 15 minutes” from 1998 – 2017.

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The average trade has seen SPY drop over 0.2%, and the average losing trade has seen it close down 0.32%. That’s a sizable average move for a 15-minute period. Three of the last six years have bucked the trend and closed up. Prior to that the results were extremely bearish. Wishing you a happy and prosperous 2019!

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Last Day Of The Year History (And Why Traders Need An Open Mind & Adaptability)

The last day of the year used to be consistently bullish for the market. But that has changed since the turn of the century. This is true across a number of indices. The most dramatic example is the NASDAQ, which I highlighted here on the blog a few years ago. I have updated the chart below.

2018-12-28

Closing up 29 years in a row is fairly astounding. Just as astounding is the abrupt reversal and move lower for 15 of the next 18 years. I have no good explanation for why such a formerly consistent edge changed, but it did.

This Nasdaq study is a great reminder though. The market is constantly changing and evolving. 2019 is just a few trading hours away. I’m not sure what it has in store for us, but I know it will play out in its own unique pattern. We will see clues along the way, and many of the truisms we’ve identified through studies over the last 11 years at Quantifiable Edges will continue to work. But some may flounder. And when something stops working, like the “last day of year bullishness” above, then I will do my best to recognize it early. Examining edges is more than just running numbers. Researches and traders need to keep an open mind, understand the market is continually evolving, and adapt. Best to all in 2019! I hope it is a prosperous year for you and I hope Quantifiable Edges proves helpful along the way!

 

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The little girl study and the horrid Crash of 87

Every once in a while I come across a study that reminds me an awful lot of Longfellow’s “The little girl”.

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After the strong and persistent selling over the last few days I decided to examine other times like now where the SPX dropped at least 1.5% for 3 days in a row. The study below looks back to late 1987 and shows all 10 occurrences over the time period, along with their 10-day returns. The consistency and size of the bounces over the next 10 trading days is “very good indeed”.

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But the prior instance noted at the bottom of the list was “horrid”.

 

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CBI Hits 20+ for the 12th Time – A Look at the Previous 11 Instances

The Quantifiable Edges Capitulative Breadth Indicator hit 20 on Friday. That is just the 12th time since 1995 that the CBI reached that high. A very high CBI reading implies that there is a substantial number of stocks that are undergoing capitulative selling and primed for strong reversals. A high CBI can also act as a signal that the market is about to bounce. The table below is taken from the CBI Research Paper. It examines all 11 previous instances, how long it took before an intraday and a closing bottom was reached, and what level marked the peak CBI for each instance.

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To learn more and see charts for all of these instances, you can download the CBI Research Paper (free). Instructions on how to do so can be found here.

 

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Why No Fed Action Is Needed For Lighter Quantitative Tightening In The Coming Months

The Fed meeting this Tuesday and Wednesday is being closely watched by Wall St. Policy changes and rhetoric about future policy could set the tone for trading. A rate hike is currently expected, though there is some doubt. Futures are currently pricing in about a 76% chance of a hike on Wednesday.

In addition to rate policy, the Fed could also look to make changes to its Quantitative Tightening (QT) policy. An easy way for them to move from a hawkish to a more dovish approach at some point would be to reduce the monthly QT schedule. The current schedule calls for allowing up $50 billion per month to roll off the books through expirations that are not reinvested. The breakdown of the $50 billion is $20 billion in AMBS and $30 billion in treasuries. But looking at the treasury expiration schedule shows us that we are now in a period where $30 billion of expirations is becoming rare. This can be seen from the table below, which is taken from the Fed’s website.

2018-12-16

December will see a $18 billion worth of treasuries maturing. January will be even lighter with less than $12 billion in expirations. And after a big QT amount in February, March will also fall well short, with $22 billion set to expire.

The big takeaway with regards to QT is that December and January will have greatly reduced amounts without any policy changes. There is little reason for the Fed to even consider changes here until the January meeting at earliest. And $50 billion per month will only be reached occasionally after that.

QT can serve as a headwind for the market. But that headwind will not be as strong the next couple of months.

To learn more about how these kind of Fed policies have impacted market movement over the years, you may download the Fed-Based Quantifiable Edges for Stock Market Trading for free. More info here.

 

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The Most Wonderful Week of the Year…2018 edition

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.

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The stats are extremely strong. This year I also decided to throw in the 5-day equity curve.

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The 2 sizable dips you see were 2000 and 2011. And even with those shown, it is a very persistent move higher. Price action has been tough lately, but the bulls should have seasonality on their side next week.

 

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90 Years Of Death Crosses

The SPX could complete a “Death Cross” formation today or tomorrow, in which the 50-day moving average crosses below the 200-day moving average. In the past I have looked back to 1960 when examining Death Crosses. This time I decided to use Amibroker with my Norgate database, which goes back to 1928, and examine Death Crosses back as far as I can. This made for an interesting starting point, because the 1st instance, in 1929, came shortly after the 1929 market crash that was followed by the Great Depression. It was also followed by the most substantial decline – by far. Let’s first look at a list of all the Death Cross formations and how the SPX performed while they were in effect.

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Below are summary stats for the above trades.

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Interestingly, 33 of the 46 instances (72%) actually saw the SPX realize gains while the Death Cross was in effect. The problem is the losing trades were very large. And even most of the winners saw a sizable round-trip lower before they were able to carve out some gains. The average drawdown for these 46 trades would have been 13.3%. And there were 5 separate instances that saw drawdowns of at least 45%.

Even though the giant losers were relatively rare, their impact is large. And the fact that the 1st instance was the worst instance also provides a great example how devastating large drawdowns can be. The profit curve below shows a hypothetical portfolio of only being invested in the market during SPX Death Crosses.

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The 1st instance from 1929 – 1933 saw the portfolio rise to $120k before falling down as low as about $20k and then finishing that trade with a value of about $34k. And it has never managed to get back to breakeven. The 72% “win rate” on the Death Cross tells me it is NOT a reliable timing device. But the few instances of massive losses show just how valuable it can be to protect gains and avoid large portions of nasty bear markets. If we get into a big bear market, I won’t actually be sitting out of the market for several years. But it does allow traders to adjust strategies, exposure and other risk parameters. The Death Cross / Golden Cross on its own is not a great system. But it can help traders put the market into a context where they can better evaluate opportunities. And I have also found in helpful when combining with other timing indicators.

 

Note: The Quantifiable Edges Market Timing Course does look at the Golden Cross / Death Cross in combination with other timing indicators.

 

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When SPX Closes Higher On Bad Breadth

While the SPX closes higher on Tuesday, NYSE breadth was weak – both from an % Up Issues and % Up Volume standpoint. This triggered the study below from the Quantifinder. I also discussed it in last night’s subscriber letter.

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Here we see numbers suggesting a substantial bearish edge over the next 1-4 days. Below is the full list of instances and their 4-day returns.

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Aside from the one trade in 2012, the moves lower have been generally strong and very consistent. Traders may want to take this into consideration when setting their bias for the next few days.

 

 

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Why Wednesday’s Disappointing Afternoon May Be Bullish

After a couple of large down days and a big gap up Wednesday morning, the rest of Wednesday was a disappointment for the bulls. But the failure to follow through on the morning strength is not necessarily a bad sign looking out over the next couple of days. The study below from the Quantifinder was shown in last night’s subscriber letter.

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Instances are very low here, but we see some examples of powerful buying over the next few days. While I am seeing a mix of studies right now, this one favors the bulls. Traders may want to keep this in mind as they consider their trading bias.

 

 

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Thanksgiving Week Seasonality – An Updated Look

The time around Thanksgiving has shown some strong tendencies over the years – both bullish and bearish. I have discussed them a number of times over the years. In the updated 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.

2018-11-19

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% of the time between 1960 – 2017. The average instance managed to gain about 0.3% for each of the 2 days. (This is shown in the Avg Profit/Loss column 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 66% 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 – 2017 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 9-5 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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