The Market Loves Tax Day

In the 4/18/16 blog I showed a study about US tax day (normally April 15th). The reason tax day may be important is that it is the last day that people can make IRA contributions to count for the previous tax year. This can create a last-minute rush and you will often have an inflow of funds heading into the market right around and on April 15th. Fund managers will often put this money to work immediately and it creates a positive bias for the market. Below I have updated the study and included a profit curve.


Strong stats and a good looking curve that has moved from lower left to upper right. Traders may want to keep both this and April opex in mind next week.


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The Problem With Unfilled Gaps Down From Intermediate-Term Highs

I saw some bullish studies emerge last night. But there was a study below that was not favorable that I thought readers would find interesting. One potential issue with Tuesday’s decline is that it included an unfilled gap down. Generally, an unfilled gap down from a high has more trouble quickly rebounding that a decline that does not include an unfilled gap. Unfilled gaps from high levels will often trap some recent bulls that bought the day before. The unfilled gap meant they were not given an opportunity to exit their positions with a profit. And if they are feeling anxious, that could lead to some more selling the following day. At the very least, they are less likely to be let off the hook as easily as if there was not an unfilled gap. You can see this exemplified in the studies below, which look at down closes from 50-day highs in SPY. The 1st test excludes instances with unfilled gaps, the 2nd test includes only those with unfilled gaps.



The difference is evident. The trapped bulls make the next day less appealing, and suggest a mild 1-day downside edge.

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Low Volume At Highs Does Not Provide The Short-Term Bearish Edge It Once Did

Years ago, strong overbought readings during an uptrend were easily sold – especially when volume came in very light. But that has not held true in recent years. There were several studies I examined last night that noted the low volume, but they have all lost their edge over the last several years. An example can be seen in the chart below, which is representative of the results I was seeing.


Low volume at a new high has not seemed to matter during this decade. Perhaps it is due to such a long and persistent bull market. Perhaps off-exchange volume or increased derivatives trading has changed the importance of NYSE volume. Or maybe the SPX mean-reversion tendency has lessened. But whatever the reason, a new high on low volume does not seem to be a bad omen anymore.


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Over 90 Years of Golden Crosses (and a look at past drawdowns)

The SPX made a Golden Cross formation on Monday. A Golden Cross occurs when the 50ma crosses over the 200ma. Having the 50ma above the 200ma is commonly considered a bullish market condition – and generally it is. I used my Norgate data and Amibroker software to look back as far as 12/31/1928. Below is a list of all Golden Crosses since then. (Note that prior to 1957, S&P 90 data was used. The S&P 90 is considered the predecessor to the S&P 500.)


Since the 1961 trigger, the Golden Cross has served as a fairly good timing device to sidestep large portions of bear markets. But prior to that it was not nearly as effective. This can be seen in the drawdown chart below. (Note: Overnight Fed Funds rate was used to calculate nightly interest starting in July 1954, which is as far back as my data goes. Prior to that, no interest rate was assumed when out of the market.)


While drawdowns have been mostly quite moderate since the mid-50s, prior to that there were some very large drawdowns to endure. Even with these drawdowns, the Golden Cross would have beaten “Buy and Hold”. Generally, I consider it a bullish indication. But it is not a bulletproof long signal.


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An End of Quarter Edge

It is worth noting that Friday is the last trading day of the quarter. And the last day of the quarter has some interesting characteristics. I often hear the term “window dressing” mentioned by the media when referring to end of quarter activity. The suggestion is that fund managers will make late adjustments to their portfolios, in order to make them appear more attractive. So their list of large holdings might show some strong winners instead of losers for reporting. And they might do some extra buying of certain holdings on the last day or so of the quarter in order to push the price higher. Exactly what activity will be undertaken is difficult to anticipate, but one thing I have found is that small caps tend to outperform large caps on the last day of the quarter. This can be seen below in the comparison of DJI to Russell 2000 returns since June of 1987, which is as far back as my RUT data goes.


That is a sizeable difference in performance. On average, the Russell has outperformed the Dow by 0.5% on the last day of the quarter, looking back to mid-1987. As a pair, the Russell has outperformed the Dow 75% of the time, and gains on winning pairs trades would have outsized losses on losing pairs trades by over 4:1. A little something to keep in mind this afternoon as you prep for end of quarter tomorrow. Note: More details about this were provided in last night’s subscriber letter. To see them, you may take a free trial.


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Seasonality May Again Flip This Week…To Bullish

With regards to seasonality, we are in an interesting period right now. The last couple of weeks the market played out well according to seasonal patterns. We saw March opex week put in nice gains as it often does. And then we saw the week after Quad-witching suffer losses this past week. Interestingly, the week after the 4th Friday in March has been a strong one over the last 21 years. (Not as much before that.) We can see this in the study below.


Numbers here are very good. I’ll note that the following week could be 4 or 5 days since it is sometimes impacted by the Good Friday holiday before Easter. Below is a look at the 4-day profit curve.


No red flags based on the curve. There appears to be a good chance the market will have a seasonal wind at its back this upcoming week. But I do have 2 concerns about the above study: 1) As already mentioned, Easter sometimes falls during this time, so some of the positive seasonality may be due to the holiday. 2) The turn of the month often offers good numbers. And early April has seen a lot of good returns over the years. Often you will get a little early-April action in the week following the 4th Friday of March. But that also is not the case this year. So the market MAY have a bullish seasonal wind at its back this week, but my confidence is a little lower in that than the seasonal studies I have shared the last couple of weeks.

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Is the $SPX Prone to a St. Patrick’s Day Hangover?

St. Patrick’s Day was yesterday. Traditionally known as the biggest drinking holiday, I wondered whether the stock market often suffered a hangover the next day. The study below looks at performance for SPX on the day after St. Patrick’s Day from 1978 – 2018.


The numbers appear impressively bullish. Below is a look at the profit curve.


This, too appears impressive.

Unfortunately, if we go back any further in time, the results are not nearly as compelling. So I am not sure there is a real seasonal edge here. But it does appear that the market is often able to bounce back from a night of drinking without any negative effects.


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Amibroker Code Now Available For Quant Edges Numbered Systems (and free for Annual Gold subscribers)

One favorite feature for Quantifiable Edges subscribers is access to the “Numbered Systems”. The Numbered Systems are 8 long-side setups and 2 short setups that include entry and exit rules for trading stocks or ETFs. Quantifiable Edges subscribers are able to access the complete rules, the Tradestation code, and even a spreadsheet published each night that shows any S&P 500 stocks or ETFs (from our list of about 100) that are setting up for entry the next day. I am pleased to announce that in the last week, I just made Amibroker code available as well. The Amibroker code allows users to run backtests and explorations for the Quantifiable Edges Numbered Systems. It is free for all Quantifiable Edges Gold Annual subscribers. (Gold Monthly subscribers may purchase it as an add-on for $100.) I am excited to be able to make Amibroker code now available, and anticipate there will be more Amibroker code packages available soon.


Free 1-week trials to Quantifiable Edges are available here. No credit card required. Just an email to send the letters to.

The Bearish Aftermath Of Quad Witching

A Twitter follower ( @SonnyRico ) asked me about weeks following Quad-witching, which occurs in March, June, September, and December. As I have shown in the past, the 2nd half of December has shown bullish tendencies historically (ignore 2018), but those other 3 have NOT been good weeks for the market. In fact, back in September I discussed the “Weakest Week”, which is the week after September opex. In the Quantifiable Edges subscriber letter that same week (free trial here) I showed a table with the best and worst weeks of the year since 1988. Below is an updated version of that table, showing just the bottom 8 weeks. (Note I did not include weeks after the 5th Friday of the month, since instances for those were greatly reduced.)


We see here that the week after opex for September, June, and March have in fact been the worst 3 weeks of the year over the last 31 years. You’ll also note that the whole group shown follow either the 1st or 3rd Friday of the month. And if I were to show the best weeks of the year, you’d notice that they all follow the 2nd and 4th Fridays of the month. Below is a look at results if someone were to have bought opex Friday’s close in March, June, and September since 1988.


The stats are poor as we knew they would be. The strong, steady downslope is also supportive of the idea of a seasonally bearish edge. Traders may want to keep this in mind next week.


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Options Expiration Week Performance By Month – 2019 Update

Next week is monthly options expiration week. I’ve noted several times over the years that Op-ex week in general is pretty bullish. March, April, October, and December it has been especially so. S&P 500 options began trading in mid-1983. The table below is one I have showed in March each of the last several years. It goes back to 1984 and shows op-ex week performance broken down by month. All statistics are updated.


While October and December have been more reliable, March op-ex week has seen the most in total gains. Perhaps the upcoming bullish seasonality can help to market to bounce next week.


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3-day Pullbacks from 50-day High to 10-day Lows

The decline in SPX meant it was the 3rd day in a row in which it closed lower. 3-day pullbacks will often suggest an upside edge. I also found it notable that 1) the pullback originated from a 50-day high, and 2) it left SPX at a 10-day low. So I examined other times we saw such drops, and found some interesting results.


Historically we see that 3-day drops from 50-day highs to 10-day lows have often by followed by a bounce in the next few days. Traders may want to keep this in mind as they determine their trading bias.


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The Extreme Persistence Of The Current SPX Rally

The last time the SPX closed below its 10-day moving average was January 3rd. That means it has now been 35 straight trading days that SPX has closed above the 10ma. That is a very long streak. Below is a list of all streaks since 1928 of 35 days or longer. (Note: prior to 1957 S&P 90 Index data is used. This is the predecessor to the S&P 500.)


I have highlighted the “recent” instances. Everything prior to the highlighted group came before the Space Invaders arcade game was released. At this point is most likely going to take a few days to drop all the way below the 10ma, since it is stretched a good amount above it right now. My takeaways from this study are 1) the market is well overdue a pullback, and 2) I am not inclined to get excited about taking on new long positions until we get this short-term reset below the 10ma.


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Historical Performance Following State of the Union Addresses

With tonight being the State of the Union Address I decided to take another look at an old study that examined SPX performance following past speeches. The data table below looks back to 1982. There were a few instances, such as 2001 and 2009 where the speech was not an official “State of the Union”, but was delivered under a different name. I have included those speeches in the results as well.


The stats do not suggest much of an edge. But the profit curves seem to tell a more interesting story. Here is the 5-day curve.


All the curves look something like this in that since the turn of the century the market has tumbled after these speeches rather than been inspired by them. I guess they just don’t write speeches like they used to.


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Why Waiting Until The Announcement Is A Tough Way To Trade The Fed

Wednesday is a Fed Day – a day in which the Federal Reserve concludes their scheduled meeting and releases a policy statement. Fed Days have historically shown a bullish inclination (up until Powell took over last year, as I showed on Sunday). One interesting aspect of Fed Days that I covered in the book is that the bullish inclinations have basically played out prior to the actual Fed announcement. Sharp moves often occur after the announcement, but they have not been consistently bullish or bearish historically. This can be seen in the two studies below.



A couple of notes:

1)      The 2nd test is showing 1 less instance, because my data provider was missing intraday data for 1/30/2007, which was the day before the Fed Day.  So no purchase was triggered.  But in looking at ES futures data that day, it closed up a mere 1 tick (0.25 points).  So that trade had very little impact on results.

2)      There were a few days where the Fed announcement came out before 2pm.  (Between 2010 and 2012 they had some early announcements at 12:30.)  Additionally, the formal announcement for a long time was 2:15pm.  In any case, making minor adjustments for the actual release time would make very little difference, and the point would remain exactly the same.  The bullish edge has all been realized prior to the actual announcement.  After the announcement, returns have been very inconsistent.


Have a happy Fed Day tomorrow!


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Is Jerome Powell The Most Hated Fed Chairperson Ever?

Fed Days have a long history of showing a bullish tendency, and we have a large number of Fed Day studies to refer. For those that are unaware, a Fed Day is simply a day where the Federal Reserve completes a scheduled meeting and provides a policy announcement. Meetings typically take place 8 times per year, and in recent years the meetings have all been 2 days in length, with the 2nd day being the “Fed Day”. Two good places to find studies related to Fed Days are the Quantifiable Edges Guide to Fed Days book, and the Fed Study category on the blog.

Below is a long-term look at Fed Day performance since Paul Volcker became chairman in August of 1979.


That is a long and fairly steady tendency we see for the market to rise on Fed announcement days. But recent instances have struggled. Below is a breakdown of Fed Day performance by Fed chairperson.


I don’t know Mr. Powell. He might be a wonderful, generous, caring person who is fun at parties, has great dance moves, and is kind to animals. But for some reason, the market sure seems to hate him. Fed Days under every other chairperson since 1979 have shown a strong upside tendency. But Mr. Powell’s Fed has garnered a negative reaction every time. Here’s the full list since he took over last year.


Nothing good to see here. But perhaps we should have realized the market hated him when the SPX closed down over 4% on his first day on the job (2/5/18).

Of course the Powell comments are mostly tongue in cheek, but it is worth noting that Fed Days have been mired in a previously unprecedented losing streak lately with seven negative reactions in a row.


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