Strong Rally Days Between Christmas & New Year’s

The week between Christmas and New Year’s is often a quiet one that is not prone to large-move days. So strong rallies like we saw on Tuesday are a bit unusual this time of year. I looked back to 1970 to see what has followed other times when SPX rose over 1% on a day between Christmas and New Year’s. Results are below.

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The stats here all point to a bullish edge. Most of the gains were realized in the first 2 days, but the edge does appear to persist through day 5.

 

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‘Twas 3 Nights Before Christmas – NASDAQ Version Updated

I’ve been posting and updating the “Twas 3 Nights Before Christmas” study on the blog here since 2008. The study kicked in at the close yesterday close. This year I will again show the Nasdaq version of the study. While all the major indices have performed well during this period, the Nasdaq Composite has some of the best stats.

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The stats in this table are strong across the board.  An average year posted a gain of nearly 3% over the next 8 days.   The stats do not look as strong as last year though, because 2014 was the worst year so far when looking out 8 days.  The note at the bottom shows reliability of some kind of bounce has been nothing short of incredible. Traders may want to keep this one in mind over the next couple of weeks.

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Historical SPX Performance When Rates Start To Rise

Fed announcing Wednesday that they will begin raising rates for the 1st time in 11 years. Since 1990 there have only been 4 other cycles of rate hikes. I decided to measure SPX performance from the start of those cycles. I found that one month later the stock market was trading lower every time. But one year later it was higher every time. Individual returns (based on $100k/trade) can be found in the table below.

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Of course it is dangerous to draw conclusions from just 4 instances, but I thought it was interesting and somewhat noteworthy nonetheless.

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Another Look At Thanksgiving Week

Historically Thanksgiving week has shown some very strong tendencies. The table below is one I have shown a few times over the years. I decided to update it again this year.

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Monday and Tuesday don’t show anything suggesting an edge. Monday’s total return was actually negative until 2008 when it posted a gain of over 6%. Wednesday and Friday, on the other hand, appear to be strongly bullish. And the Monday after Thanksgiving appears to exhibit a bearish edge.

 

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Over 90% Of The Time Reversals Like Monday Have Done *This* The Next Day

Last night I examined the current SPY pattern. I took into account Friday’s short-term closing low and Monday’s outside day and strong close. The study I concocted only triggered 11 previous times. But 10 of them saw lower closes the next day and the Average instance had a 1-day loss of over 0.9%. Below is the list of individual instances.

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Not only have 10 of 11 closed lower but the average drawdown has been nearly 3x the size of the average run-up. This suggests a bearish edge for Tuesday.

I should note that I have seen other evidence over the last few days suggesting the bounce should have further to go. So although the study above is interesting and provides me a warning for Tuesday, I personally do not view it as reason enough to short the market.

 

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Two Unfilled Down Gaps For SPY — Good News?

Both Thursday and Friday saw SPY leave an unfilled gap down. That is fairly unusual. In the study below I examined other times it has occurred since 2002 while SPY was below the 200-day moving average.

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Every instance except one was higher five days later. While instances are a little low, the numbers are compelling and suggest an upside edge over the next week.

 

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How Monday’s Strong Drop May Be Setting SPX Up For A Bounce

When a market has already sold off for multiple days and the selling accelerates that can often mark a point where a bounce becomes likely. Monday’s selling triggered the Quantifinder study below. All stats are updated.

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These results appear extremely compelling. The consistency is very strong. Of course the market is always capable of doing things it hasn’t before. We’ve seen plenty evidence of that since Quantifiable Edges started. So although this condition has led to a bounce in every instance evaluated over the test period, it’s no sure thing. In fact just before the period shown there were 2 trades that were losers. Still, the evidence appears strong enough to suggest a bullish inclination.

 

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Happy Columbus Day…Again?

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. A few times here on the blog (most recently 10/13/13) 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 that study.

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I’ve circled some of the more impressive stats here. With 75% of trades profitable and winners twice the size of losers risk/reward has been very favorable. The note at the bottom of the stats table is also interesting. Anytime the market did NOT do the expected, it went hard the other way.

 

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The Zweig Breadth Thrust Signal

The strong breadth we have seen recently has caused the 10-day exponential moving average of the Up Issues % to rise up over 63%. 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. It triggered at the close on Thursday. Below is a list of all of the signals since 1970 along with their 4 week results.

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Every instance has closed higher 20 days later.  (And 19 and 18 and 17 and 16 and 15 and 14 and 13.)  All 7 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%.  It will be interesting to see how this one plays out, but traders may want to keep it in mind over the next few weeks.

 

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What the Stretced VXO is Suggesting

The VIX and VXO have dropped sharply over the last 7 days. These are measures of options premium. When they are falling it means premium is declining, and options traders are less fearful. The study below looks for times when the VXO becomes stretched more than 20% below its 10-day moving average. I have updated all the statistics.

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Reward/risk appears to strongly favor the bears based on the limited sample size. Traders may want to take this into consideration when considering their bias over the next few days.

 

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What Reversals Like SPY Had On Friday Have Often Led To The Next Day

Friday had an exceptionally weak start and strong finish. Such reversals during long-term downtrends have often failed to see further buying the next day. This can be seen in the study below.

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The numbers here are solidly bearish. 70% of the time SPY has closed down the next day and the average instance lost over 0.75%.

 

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Another CBI Spike And The Edge That Suggests For The Short And Intermediate-Term

The Quantifiable Edges Capitulative Breadth Index (CBI) rose up and closed at 12 on Monday afternoon.  Discussion of the CBI has been fairly regular over the years here at Quantifiable Edges, but for those that are new or would like a refresher, a detailed description of the CBI can be found here.  Or if you want to review past studies I have published on the indicator click here for more research related to the CBI..

 

The CBI measures the number of signals among S&P 100 stocks for my Catapult System.  While the system is proprietary, I have used it since mid-2004 and published all the signals in the Quantifiable Edges Subscriber Letter real-time since the letter’s inception in 2008.  The basic idea is that the more capitulation selling that is evident among individual stocks, the more likely it is that the market as a whole is capitulating and primed for a bounce.

 

While the record has not been perfect, it has been extremely good, and it has helped me to identify many high-probability trades during over-emotional market periods.  The study below is one I have shown in the past.  It examines CBI readings of 10 or higher while the SPX is under its 200-day moving average.  Ten has been a level I have often referenced where the reading is getting relatively high and the market is typically within a few days of a bounce.  Three or lower represents a CBI reading that I consider market-neutral.  The study looks to enter on readings of 10 or higher and exit the market only when the CBI returns to 3 or lower.

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The record is impressive. Below is the profit curve.

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The strong persistent upslope serves as confirmation of the upside edge.

 

I’ll also note that the move in the CBI to 11 or higher has often suggested an intermediate-term edge, not just a short-term edge.  In July I posted a study showing how spikes to 11 or higher have typically led to intermediate-term bounces.  And measuring out 20 days from the trigger day the market was higher all 23 times from 1995 through early this year.  As it turned out the July and August spikes were the first instances since 1995 (as far back as CBI history is available) that did NOT see the market close up 20 days later.  But they were not total failures.  They both did see bounces over the next few weeks and both were positive as late as 17 days later.  They just couldn’t make it to 20.

 

 

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Some Simple Shorting Systems For Downtrends

SPX closed at a 10-day high on Tuesday. New short-term (and intermediate-term) highs will sometimes get traders excited. When the market is in long-term downtrend mode, this excitement is often misplaced. Way back in a blog post on 4/3/09 I showed a number of “systems” that looked to sell short when the SPX made X-day highs but was below the 200ma. I have updated the results table of those little systems below.

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Stats here are solid across the board. The Win Rate, Profit Factors, and Average Trade stats all suggest a good chance at market dip. Hitting new short-term highs is generally not something that bulls should get excited about while the long-term trend appears down.

 

 

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When A Follow Through Day Is Immediately Followed By Strong Selling

Yesterday I discussed Tuesday’s Follow Through Day (FTD) and some possible implication based on breadth and volume statistics. Wednesday was interesting because we saw a big selloff immediately follow Tuesday’s FTD. Past occurrences of this have been somewhat rare, but also somewhat suggestive on a 1-day timeframe. This can be seen in the study below.

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As I mentioned, the number of trades is a bit low. But the early indications appear to strongly favor another day of selling. Especially impressive is the fact that the average of the 9 down instances was nearly 4x as large as the biggest up day. That is a risk/reward scenario that strongly suggests a 1-day downside edge.

 

 

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Tuesday’s Follow Through Day Lacked 2 Important Things

One notable bit of evidence that emerged on Tuesday was the fact that it qualified as an IBD Follow Through Day (FTD). I have done a lot of research on FTDs over the years. Much of that research can be found on the blog. Here is a link.

http://quantifiableedges.com/category/ibd-follow-through-day/

A couple of filters that have appeared useful in examining FTDs are breadth and volume. Tuesday’s FTD was accompanied by moderate breadth and volume. So let’s examine results of other instances with FTDs that occurred on modest breadth and modest volume.

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The failure rate here is substantial no matter how you look at it. A short-term downside edge is suggested which largely plays out in the 1st 2 days. Every instance closed below the entry price over the next few days. And these FTDs have demonstrated a paltry 20% success rate. All these stats are impressive and point to a downside inclination over the next few days.

(Definitions for “successful” rallies as well as FTD determination criteria can be found in this post from 2008.)

 

 

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