In a Traderfeed post on Monday Dr. Brett Steenbarger presented the concept of using the EEM:SPY pair as a sentiment gauge. The idea is that when EEM is outperforming SPY, traders are more willing to take on risk and stocks as an asset class should benefit. When SPY outperforms EEM, then traders are seeking relative safety and the forward outlook for stocks isn’t as good.

Last year I used the Nasdaq vs. S&P 500 relative strength and showed a model that used basically the same risk seeking/aversion idea. A link to that post may be found here. You may also download the model (though you will need to update it with recent prices).

I thought it might be interesting to substitute EEM for the Nasdaq values using that model. (Note: my relative strength calculation, which originally came from Gerald Appel’s Book, “Technical Analysis, Power Tools for Active Investors” is a bit different than Dr. Steenbarger’s calculation. The model calculation examines relative strength over a 10-week period.) After doing so I noted the following observations:

• Investing only when the EEM is leading the SPY would have resulted in being in a position about 2/3 of the time.
• By placing your money in SPY, total return since 6/13/2004 would have been a little over 35% using the model vs. about 20% with SPY buy and hold.
• In both cases all of the gains were made since the March 2009 bottom.
  Prior to that bottom, the model preserved capital quite a bit better than SPY buy and hold.
• Over that same time period, EEM appreciated about 220%.
• Buying EEM instead of SPY when the model was positive would have resulted in a gain of about 186%.

In summary, while history is short, Dr. Brett’s EEM:SPY pair seems to work well as a sentiment indicator. As we saw with the Nasdaq:S&P model last year, there appears to be an advantage not only in entering the market when the riskier index is leading, but also in trading the riskier index rather than the SPY.

Hectic morning here. Yesterday the Quantifinder identified numerous studies with bearish implications. Common themes were low volume, low put/call ratios, and low VIX:VXV Ratio. Below is a link to a post from January:

https://quantifiableedges.blogspot.com/2010/01/declining-spy-volume-at-new-highs.html

For those who may have missed it, below is a link to my chat last Friday with Charles Kirk.

https://kirkreport.com/tkr/ScQB

Lastly, a reminder that today is the webinar by Scott Andrews that will look at using opening gaps to enhance swing trade entries/exits. I haven’t seen a preview yet but I’m told he has some interesting numbers to show.

https://quantifiableedges.blogspot.com/2010/04/using-opening-gap-to-time-swing-trade.html

Scott Andrews of “Master the Gap” will be conducting a webinar on Tuesday April 13th at 4:30pm EST that is especially designed for readers of Quantifiable Edges. Scott and I became acquainted within the last year and found it interesting that we utilize very similar approaches for trading very different time frames. While much of the focus with Quantifiable Edges is on swing trading with some discussion of day and intermediate-term edges, Scott uses his quantitative research primarily to trade the opening gaps. His service also covers some other daytrading approaches for times when gap trades are not active.

We’ve had several discussions about how our research tends to be quite complimentary and on a whole can often provide a greater edge for those who may look to incorporate it. Scott’s webinar will show how his gap-focused research can possibly aid traders who are typically more swing-oriented (like me). You may use the link below to see more information on the webinar and to sign up. (It’s free.) If you trade intraday and like the quantitative approach used at Quantifiable Edges, then there’s a good chance you’ll find the webinar interesting.

https://www.masterthegap.com/public/mgcal.cfm?calID=1&caldate=4/13/2010

I’m excited to be speaking with Charles Kirk and his readers today at noon EST. Some of the focus of what we’ll be discussing will be system trading, including some of the systems available here at Quantifiable Edges. If you’d like to attend and perhaps ask some questions then please come by.

https://kirkreport.com/tkr/ScQB

The session will also be archived and I’ll provide a link after it’s all done.

The Fed will be holding a special meeting today that was just announced last week. (Hat tip Market Rewind.) Below is a link to the announcement.

https://www.federalreserve.gov/boarddocs/meetings/2010/20100405/advancedexp.htm

I’ve published a substantial number of studies related to Fed Days and the action that takes place following them. Most of the studies I’ve published have only looked at scheduled Fed meetings.

Unscheduled Fed meetings have been typically been surprises where the announcement came out of the blue – and the time of day was not consistent. Monday is the first unscheduled Fed meeting that I can recall that has been announced beforehand. While behavior may fall in line with other scheduled Fed meetings, I believe it would be dangerous to make any assumptions in this unique case.

Traders should be aware that news will likely hit in the afternoon that may affect the market.

I’ve noted before how extremely low volume during an upmove can lead to a pullback. Below is a study the Quantifinder identified from the 11/16/09 weekly subscriber letter.

Implications seems to be that there is a downside edge over the next few days – especially days 1 and 2. Below is an equity curve using a 2-day exit strategy.