Blog - Quantifiable Edges

Quantifiable Edges CBI Hits 10 For First Time Since November 2012

Posted by Rob Hanna in CBI, Quantitative Study February 6, 2014

One notable about Wednesday’s action is that the Quantifiable Edges Capitulative Breadth Indicator (CBI) reached 10 for the 1st time since November of 2012. In the past I have shown a fair amount of research demonstrating CBI levels of 10 or greater have generally been enough to lead to a market rally within a few short days. One simple strategy I have shown in the past that could take advantage of a high CBI is to purchase SPX when the CBI reaches 10 or higher, and then exit this trade when the CBI gets back down to 3 or lower. CBI history is available back to 1995 (and Quantifiable Edges gold subscribers may download it directly). Results below show how this strategy would have performed from 1995 – present.

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As you can see, results have strongly favored the bulls. A very high percentage of the instances would have led to winning trades, and overall gains have swamped overall losses by over 10x. Another thing to consider it the market’s long-term trend. Personally, I have found that relatively strong selloffs during long-term uptrends are substantially different than relatively strong selloffs during long-term downtrends. In other words, CBI readings > 10 have occurred under different conditions and led to different kinds of rallies depending on whether the market was trading above or below its 200ma. Below is a listing of all 9 previous instances above the 200ma.

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As you can see, instances above the 200ma have been more reliable, but less powerful. The average trade under these circumstances is just over 1%. And the largest winning trade was 2.36%. But the average trade when below the 200ma has been 3.2%. This is larger than the largest above the 200ma, and nearly 3x the average. So I believe it is important to make this distinction when setting expectations for the bounce over the next few days. While the bounces have not been as strong, the drawdown has been much more controlled under these circumstances. The largest drawdown so far has been less than 4%. Of course nothing is certain, and new history is constantly changing the odds. But as far as short-term indicators go, the CBI is one of my favorites for predicting a short-term bounce.

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One Look At The January Barometer

Posted by Rob Hanna in Quantitative Study, seasonality February 3, 2014

The January Barometer is a fairly famous study from the Stock Traders Almanac. It says that “as goes January, so goes the year”. In other words, a positive January will typically lead to a positive year, while a negative January can be a warning. Let’s look at how the SPX has done for the remaining 11 months of the year based on how January performed.

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The numbers show that in years that January has done well, the rest of the year has typically fared well also. Below is a profit curve.

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Now let’s look at how Feb-Dec has done after a down January.

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Not as many instances, but there does not appear to be the same kind of bullish tendency here. More of a crapshoot. Below is a curve.

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Certainly not a chart to trade off of. So it would have been nice if January finished positive. But it is not a sign of impending doom. Just that we don’t have the kind of momentum that would be preferable.

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Performance After A 20-Day Low On A Fed Day

Posted by Rob Hanna in Fed Study, Quantitative Study January 30, 2014

One potential positive about the intermediate-term low Wednesday is that it came on a Fed Day. I looked back at other times SPX made an intermediate-term low on a Fed Day.

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Results over the first few days are underwhelming, but once you get out 1 week they look quite impressive.

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Historical Reactions Following Very Bad Fridays (updated)

Posted by Rob Hanna in Quantitative Study January 27, 2014

The study below appeared in the Quantifinder on Friday. It is one I last showed on June 3, 2013 and it examines large drops on Fridays. Both the Crash of ’29 and the Crash of ’87 happened on Monday. The Crash of ’87 is still remembered by many traders that are active today. There was a strong selloff on Friday and then all hell broke loose on Monday. But since then strong Friday selloffs have commonly been followed by bounces on Mondays. Perhaps this is due to the fact that fear of a crash causes what might otherwise be an ordinary selloff to become exaggerated and overdone on Fridays. Or perhaps it is just that people don’t want to hold over the weekend. Whatever the reason, the tendency to bounce has been very strong. All results are updated.

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The numbers here are all very impressive and suggest a strong bullish bias. Traders may also want to take notice of the note at the bottom of the table. A failure to bounce today could be a warning that the market is not following historical norms and the environment is becoming more dangerous.

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Historical Market Returns During MLK Week

Posted by Rob Hanna in Quantitative Study, seasonality January 21, 2014

Martin Luther King Jr. Day was on Monday. The NYSE has only observed MLK Day as a holiday since 1998. But over that 16 year period the market has not done too well during MLK week. I showed this last year in the 1/22/12 blog. I’ve updated the chart below.

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MLK week has seen the market rise the last couple of years, but prior to that it had some real struggles. Maybe the downside tendency is fading, or maybe it was just a blip and the downward inclination will reassert itself. It’s tough to tell at this point. I’m still inclined to view seasonality as favoring the bears this upcoming week.

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Another Look At A Potentially Bearish Inside Day

Posted by Rob Hanna in Quantitative Study January 15, 2014

The study below looks at days like Tuesday where the market gaps higher, never fills, and moves higher from open to close without making a higher high. It was last seen in the 3/27/13 blog. I have updated the results.

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Implications here appear somewhat bearish, with most of the damage occurring on day 1. This may be worth keeping in mind as traders formulate their plan.

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January Opex Weak (revisited)

Posted by Rob Hanna in Quantitative Study, seasonality January 13, 2014

As I discussed last month, opex week in December has historically been wonderful. But January – not so much. Below is a list of the last 15 January opex week returns (updated from the study shown last year). While it is not the case this year, January opex week often occurs in conjunction with Martin Luther King Day. So some of these weeks contained four trading days and some contain five.

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Even with the positive performance the last 2 years there has been a decided downside tendency over the last 15 years. The drawdown / run-up stats at the bottom remain quite compelling for the bears. This study still appears worthy of some consideration.

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Back to Back Outside Days for SPY

Posted by Rob Hanna in Quantitative Study January 10, 2014

Thursday marked the 2nd day in a row that SPY posted an outside day. (An outside day is a day where the security or index makes a higher high and a lower low than the day before.) It’s quite unusual to see 2 consecutive outside days. I last examined back-to-back outside days for SPY in the 5/23/13 subscriber letter. I have updated that study below.

The numbers look very impressive.

It is also worth noting that this pattern has also done well with QQQ in the past.

A Turnaround Tuesday Setup

Posted by Rob Hanna in Quantitative Study, seasonality January 7, 2014

I’ve discussed many times in the past that Tuesdays have a well-earned reputation for being a day when the market will often halt a decline. The study below is one from the larger Turnaround Tuesday study published in the 9/25/12 blog. All statistics are updated.

As you can see the market has strongly favored a quick move higher. And when that move hasn’t happened on Tuesday it has often happened in the next few days.

Some Evidence It Is About Time For SPY To Pull Back

Posted by Rob Hanna in Quantitative Study January 2, 2014

SPY has now gone 11 days without closing below its 5ma, and it closed Tuesday at another new high. The study below is one I’ve shown a few times over the years, most recently in October. It looks at other instances in which SPY has traded above the 5ma for at least 2 weeks and is now closing at a 10-day high. All results are updated.

In the past this setup has commonly been followed by a short-term pullback. The downside edge doesn’t last long, though. It seems to pretty much play itself out over the first 2 days. It is not an overwhelming edge, but it is still worth noting that SPY has been short-term extended for a while and the normal course of action at this point is a little pullback.

Should You Quit Trading Early Today?

Posted by Rob Hanna in Intraday, Quantitative Study, seasonality December 31, 2013

The table below is from a study I showed in last night’s subscriber letter. It shows how SPY has performed every year, during the last 15 minutes of trading for the year.

On average SPY has lost 0.25% in the last 15 minutes of trading. And if you just look at the losers, the average loss was 0.345%. Last year was the 1 big up year (excitement over avoiding the Fiscal Cliff?). If you are a daytrader with a long position, this might be a good day to close up shop 15 minutes early…

VXO Is Suggesting An Immediate Pullback – Or None At All

Posted by Rob Hanna in Quantitative Study, VIX December 27, 2013

Thursday we again saw the VIX and VXO close well below their recent mean. Such stretches suggest a collapse in fear has taken place among investors. The study below looks for stretches of 15% or more below the 10-day moving average that have persisted for three days.

Based on the stats table there appears to be a downside inclination. I find the note at the bottom of the study to be especially interesting. Nearly every case has experienced an almost immediate pullback, but those that didn’t went without pulling back for a long time.

‘Twas 3 Nights Before Christmas (updated Nasdaq version)

Posted by Rob Hanna in Quantitative Study, seasonality December 20, 2013

I’ve been posting and updating the “Twas 3 Nights Before Christmas” study on the blog here since 2008. The study will kick in at today’s 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 stands out as the big winner.

The stats in this table are strong across the board, and the note at the bottom shows reliability that has been nothing short of incredible. Traders may want to keep this one in mind over the next couple of weeks.

The Most Wonderful Tiiiiime of the Yeeeeeeaaaaaarrrrrrr!

Posted by Rob Hanna in Quantitative Study, seasonality December 16, 2013

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 have shown the table below every year since 2008, and have updated the results again this year.

The stats here are extremely strong. Have a happy (and most likely bullish) December Opex Week!

Learn Some Fed-Based Edges at the Festival of Traders

Posted by Rob Hanna in Uncategorized December 9, 2013

I’m going to be participating the The Festival of Traders this month for the 1st time. It is a 2-day event that features presentations from 8 traders.

I’ll be speaking about Fed-based edges in regards to numerous time-frames (from short-term to long-term, and in between). My talk is scheduled for 5:30pm EST on Tuesday, Dec 10th. Time not convenient? No worries! Register using this link and recordings of all speakers will be automatically sent to you at the conclusion of the Festival.

And beyond my talk, the line-up looks very impressive. In fact, on Wednesday 2 of the 7 guys I placed on my list of “Real Deal Traders” will be talking – Scott Andrews and Dave Landry.

This is a Quantifiable Edge I suggest you take advantage of 🙂

Again, the link to register is available here. (Nothing but an email address required.)