Unusual Action on the 3-day Pullback

Posted by in Quantitative Study May 5, 2011
A 3-day pullback on its own doesn’t provide much of an upside edge. An edge tends to appear when the pullback happens in conjunction with other things. “Other things” might include a very low 3/10 Offset HV, a deceleration in the pullback, or a seasonal advantage. None of those things are appearing right now. But I did note one interesting aspect of this pullback that seemed worth further examination. While the SPX has declined the last three days, the VIX has risen the last three days. This isn’t unusual. What is unusual is the fact that Wednesday’s drop was the biggest for the SPX, yet the rise in the VIX was the smallest of the last 3 days.  I looked at other times this had occurred since 1990.
Not a whole lot of instances but early indications are that the setup may be bullish.  I examined the instances a bit further in last night’s subscriber letter.  I tossed around whether to incorporate these results into my estimates.  Ultimately I decided not to.  The results were very variable, the number of instances was low, and the last time it occurred was 2003.  I did find it compelling enough to monitor going forward, though.
Comment off

When Months Finish Strong

Posted by in Quantitative Study, seasonality May 2, 2011

Bullish early-month seasonal tendencies have been well documented both here and elsewhere.  But what happens if we close the month at a high?  Does that sap some of the typical early-month strength?  Or is the market more likely to continue higher?  Below I show all instances since 1995 where the SPY finished a month with the highest closing price of that month.

The numbers are very compelling. Most of the upside edge occurs in week 1, but there is some follow through into week 2.

Comment off

The low VIX:VXV ratio with the SPX at a new high

Posted by in Quantitative Study April 29, 2011

Examining the VIX:VXV ratio is a concept I first heard from Bill Luby at VIX & More.  The VIX is a measure of short-term (30-day) volatility expectation and the VXV measures intermediate-term (93 day) volatility expectations.  The ratio right now is quite low – a little below 0.85.  This means that short-term volatility expectations are substantially below intermediate-term volatility expectations.  When readings this low coincide with 50-day SPX highs it suggests a possible bearish edge for the next day.  This was demonstrated in a study that the Quantifinder identified yesterday afternoon.  It last appeared in the 1/13/11 subscriber letter.  I updated it last night.  Below is an equity curve showing a 1-day holding period for this setup.

Comment off

When SPY Gaps Down Below 2 Up Closes

Posted by in gaps, Quantitative Study April 18, 2011

SPY is currently (9am pre-open) trading below the close of the last 2 days – both of which were up days.  Below is a study that shows how the market has performed open to close when this has occured in the past.

Not encouraging stats if you’re a bull.  Below is an equity curve to see how it has played out over time.

The consistent downslope acts as confirmation of the bearish edge. 

One other note: I also checked to see how many instances occured when the close of 2 days ago was a 10-day low (like now).  There was only 1.  It was 1/20/09.  It was the “worst” performer, losing about 4.3% from open to close.  Even if we sell off, I’d be very surprised to see that duplicated.

Comment off

Comparative Performance of VIX-based ETFs

Posted by in VIX April 15, 2011

A few weeks ago I held a webinar for subscribers where I discussed VIX-based ETFs. I examined the performance of several of the ETFs. I also presented ideas on how they could be traded as an alternative to a standard index trade, and under what conditions doing so might be appropriate. Below is a chart from the presentation. It shows the performance returns of the SPX, VIX, and a few of the more popular VIX-based ETFs. I have updated the chart through 4/14/11. It goes back to 11/30/10, which was the first day that XIV was available to trade.

(Click on chart to enlarge)

A few quick observations:

1) XXV is a product that is “supposed” to act as an inverse of VXX. It seems to do a horrible job of that. Instead it has almost exactly matched SPX performance. I can’t imagine ever wanting to trade something that matches SPX performance, but carries greater risk. XXV is useless.

2) VXX has been a poor long-term performer. (I discuss reasons in the video.) TVIX will likely suffer long-term as well. If you are buying for a short-term trade, then TVIX looks like a decent high-powered alternative to VXX.

3) XIV appears to be a nice alternative to a short VXX or a long XXV position.

More detailed insights are in the video. If you would like to view it, you can gain access by signing up for a free 1-week trial subscription.  (Then check out the educational videos section of the members site.)

Also, for a more complete list of VIX-based ETFs and some great information, I’d recommend visiting Bill Luby’s VIX and More blog.

Comment off

Turnaround Tuesday?

Posted by in Quantitative Study April 12, 2011

With the SPX now falling 3 days in a row I’m begining to see signs that a bounce is becoming likely.  One bit of evidence identified by the Quantifinder last night was based on the “Turnaround Tuesday” concept.  I’ve shown before that of all days Tuesday has historically had the highest propensity to halt a short-term pullback.  The study below is specific to a 3-day pullback leading up to a Tuesday.  It was last seen in the blog on August 24, 2010.  I’ve updated the results.

Results still appear to strongly favor the bulls.  The market is looking at a gap down this morning so it will be interesting to see if it can overcome the negaive momentum and make the turnaround today or in the next few days.

Comment off

Low SPY Volume A Concern

Posted by in Quantitative Study, volume April 5, 2011

SPY volume came in at the lowest level in a long while on Monday.  I’ve shown numerous volume studies in the past suggesting price highs and volume lows are typically followed by a pullback.  Below is a study from last night’s letter that examines the current setup.

The numbers here are fairly compelling, especially considering the studies used a long-term trend filter.  Bulls may not want to get overly aggressive in the next few days.  Risk appears elevated.

Comment off

April’s Early-Month Hot Streak

Posted by in Quantitative Study, seasonality April 1, 2011

1st Day of month bullish tendencies have been well documented here and elsewhere. April is an interesting month in that not only is the 1st day typically strong, but since 1994 the first week has performed especially well. This is illustrated in the table below.

Quite the little hot streak. And in case you’re wondering, the last time the 1st 4 days of April netted out to a loss was 2002.

Comment off

VXO Stretch Now So Extreme It Is Suggesting A Pullback

Posted by in Quantitative Study, VIX March 28, 2011
In last Wednesday’s blog I showed a study that the quick move from overbought to oversold in the VIX appeared suggestive of further upside.

But now we find ourselves in a situation where the VXO got extremely stretched has remained so for three days in a row. I decided to take a look at other times where this kind of extended stretch had occurred.

The numbers here appear to strongly suggest a short-term downside edge. More detailed analysis was done on the instances in last night’s subscriber letter. That analysis also supported the case for a short-term pullback.

To take a trial of Quantifiable Edges and see last night’s detailed version of this study, click here to take a free 1-week trial.
Comment off

When The VIX Moves From Overbought to Oversold in a Week

Posted by in Quantitative Study, VIX March 23, 2011

The sharp drop in the market and then subsequent sharp rebound was accompanied by strong VIX movements in the opposite directions. Moving from a position where the VIX is stretched above the 10ma to one where it is stretched below the 10ma in a short period of time is quite rare. It is something I last showed on the blog on 10/9/09. I have updated that study below.

Results over the first 2-3 days are somewhat sketchy, but once you get out beyond that they become more consistent and more powerful. Since it is commonly thought that VIX stretches below the 10ma of this magnitude suggest short-term bearish inclinations for the SPX, many people may find these results surprising. This study from 2008 demonstrates that a low VIX does NOT suggest a bearish edge. And the market conditions that create this situation (SPX posts a strong rebound from a sharp decline during a long-term uptrend) don’t scream downside edge either.

Comment off

CBI Reaches 10 for 1st Time Since July 2010 – Signals a Bounce

Posted by in CBI March 18, 2011

Despite the market move higher on Thursday the Quantifiable Edges Capitulative Breadth Indicator (CBI) rose up to 10.  The CBI is basically a measure of the number of capitulative selling triggers that are active among S&P 100 stocks at any one time.  Ten is a level I have discussed numerous times in the past.  Readings this high often lead to short-term rallies.  Below is a strrategy I’ve shown before that utiilizes the CBI.  It looks at entering the SPX when it reaches 10 or higher and then exiting when it returns to 3 or lower.

As you can see, results here are very good.  It isn’t an exact timing tool, though.  The average, runup and average drawdown are both about 3.5%.  So there is has been quite a bit of volatility associated with these setups.  The average trade takes 8 days to complete.

A detailed description of the CBI may be found here.

Numerous studies and posts associated with the CBI may be found here.

If you would like to be updated on CBI readings you may follow me on Twitter.

Comment off

From Fear to Excitement Overnight

Posted by in gaps, Quantitative Study March 17, 2011

Yesterday’s action was marked by fear as evidenced by the 20% spike in the VIX.  This morning the SPY is gapping up 1.5%.  Here’s a quick look at other instances where extreme fear turned to extreme euphoria while the NYSE was closed.

Too few instances to base any solid conclusions on.  Perhaps some indication from the early returns that the market has a chance to rally today…

Comment off

2% Gaps Down & Other Disasters

Posted by in gaps, Quantitative Study March 15, 2011

It can be difficult to know whether a very strong reaction is an overreaction. It can sometimes help to compare it to similar moves in the past. The table below is one I last showed in the 2/2/2009 blog. It looks at  all the times the SPY gapped down at least 2% to start the day. The column on the right shows how long it took for SPY to close above its gap down open (up to a week). Today I’ve also added some red arrows. These mark the other times the gap down occurred following a close above the 200ma.  As you’ll note, a 2% gap in an uptrend is quite unusual.

And for those wondering about event comparisons that is a VERY difficult thing to do. Two events I looked at last night were the 1995 Kobe earthquake in Japan and the 1986 Chernobyl nuclear disaster in the Ukraine. While their local markets were hurt badly, neither event caused much reaction in the U.S. They were essentially 3-5 day pullbacks totaling between 2% and 3.5% in the SPX.

God bless the people in Japan and the Mideast.

Comment off