In the past I’ve looked at gaps that occured after the marekt was already extended. This morning the market is set to open down big. It closed Friday in the middle of its recent range and was not extended. Below is one way to look at it.
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There appears to be a mild upside edge, though it’s nowhere near as strong as it would be if the market were already extended downwards.
The Quantifinder came up with quite a few studies last. Below is one that last appeared in the June 15, 2009 Subscriber Letter. (Stats are updated through 8/13/09.)
This would suggest a pullback over the next few days is likely. While the pullback hasn’t necessarily been severe, it has been consistent.
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We’re now entering the dog days of summer. Volume at the end of August is typically slow and many times this means less trading opportunities.
According to Dr. Brett Steenbarger “Great traders do their best work when they are not trading; unsuccessful traders do not work when they are not trading.”
With that in mind, I’ve decided to run a “Dog Days Of Summer” special promotion.
In 2008 I put together a package of Tradestation code that allowed traders to import the strategies used to test most of the studies posted to the blog in the 1st Quarter of 2008. Traders that have purchased the package have used the code to help them explore their own ideas about the market. The studies make terrific starting points for further research. They also serve as nice templates to use when exploring your own ideas. The package sells for $195.
From now until the end of August, anyone who signs up for an annual subscription to Quantifiable Edges will get the $195 2008 Q1 Studies Package included Free.
Whether you want the nightly Subscriber Letter and intraday notes and Quantifinder provided with the Gold Subscription, or the Weekly Research Letter and Silver edition Quantifinder provided with a Silver Subscription, you’re still eligible for the Dogs Days of Summer special promotion.
And yes, I’m even including it as part of the Blogger Triple Play package which comes the the VIX and More and Market Rewind products. Triple Play is now better than ever with the new features recently added to the ETF Rewind product.
So if you’ve been waiting for the right time to try an annual subscription – wait no longer. And if you’ve been considering buying the Q1 2008 Quantifiable Edges Studies Package, now you can get it free with your choice of an annual subscription. See subscription comparison here.
I hope some traders are able to take advantage of this offer and use the Dog Days of Summer to better their trading and gain new insights from both their own research and the research of Quantifiable Edges over the next year.
If you have questions, feel free to contact support @ quantifiableedges.com (no spaces).
I’m short on time this morning so I am unable to provide an update on this reaearch from last year. I thought readers may find it helpful to note that the study did trigger.
http://quantifiableedges.blogspot.com/2008/08/when-s-is-oversold-going-into-fed-day.html
In June of 2008 I posted a discussion on the importance of normalizing put/call ratios when considering whether their readings were significant. In that post I showed that the average put/call ratio had risen steadily and substantially from 2000 into mid-2008 when the post was done. I included a “starry night” graph where weekly closing levels of the CBOE Put/Call Ratio were seen as dots and the 40-week moving average was drawn with a line. I’ve reproduced that chart below updated through 8/7/09.
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What you’ll notice is that right around the time of the original post the put/call ratio began to decline. In fact the average put/call ratio is now about 20% lower than it was at its peak in ’08. A few thoughts on this:
1) A drop in the average put/call is not something you would expect during the worst bear market 70+ years. The 2000 – 2002 bear market is when the ratio began its 8-year ascension. Did traders actually become more complacent as the market cratered? The VIX action last year would suggest this was not the case. So why the drop in the put/call ratio? I suspect it has much to do with the emerging popularity of inverse ETF’s. With a new hedging tool at traders’ disposal, the demand for puts has waned.
2) “Why” really isn’t a big concern for me. What is important is that my analysis takes this information into account. Normalization remains just as important on the way down as it was on the way up. If last year you were viewing readings of 0.8 or 0.75 as possible complacence, then you need to realize that this year those readings aren’t much below average. And if the pace keeps up they’ll be average by the end of the year. Meanwhile readings that were just slightly above average last year are now fairly extreme.
Normalization can be done a number of different ways. Moving average envelopes around long-term moving averages is one simple way to do it. Another would be to use Bollinger Bands. The exact method is not what’s vital. What’s vital is that your strategies and analysis account for the fact that – like the market – the put/call ratio (and many other gauges) evolves over time.
One notable from Friday was the extremely low reading in the CBOE Equity Put/Call Ratio. It closed at 0.49 – more than 31% below its 200-day moving average. In June I looked in detail at other times the Equity Put/Call closed more than 25% below its 200ma. It suggested a bearish edge for the following day has existed since the end of 2007. Concerned that the results were just a byproduct of a bear market I also showed all of the trades since the March low. Below I’ve updated that list with some additional observations.
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The far right hand column shows the intraday runup/drawdown. I’ve circled in green the -$393.90 result from July 31st. Since the trades are based on $100,000 each, $393.90 represents a move down of about 0.4%. What you’ll notice when looking at the list is that the 0.4% drop that day was the smallest intraday drop of any of the 15 instances listed since March 10th. In red I have circled every instance where the intraday runup the next day was less than 0.4%. As you can see of the 15 instances, 7 of them had an intraday runup of less than 0.4%. This is all during a huge rally off the March lows. While it’s just one of the studies I looked at in last night’s Subscriber Letter, this one suggests risk/reward favors the downside for Monday.
The QQQQ closed at a 5-day low Thursday. This is the 1st time it has closed at a 5 day low in 21 days. It seemed to me that the 1st decent pullback after a long run higher could provide a bullish edge. So I tested it. There were only 7 previous instances of runs of 20-days or longer. In a search for more meaningful results I lowered the requirement to 10-days. Those results are below:
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There does appear to be a small edge based on the size of the average trade. The winning percentage is a bit disappointing. It isn’t much better than random. In all I’d say there’s a mild edge that largely plays out in the 1st 2 days.
Two days of sideways action has left me little to say this morning. One notable from yesterday was the very low CBOE Equity Put/Call Ratio. In June I published a study that triggered again last night and was noted by the Quantifinder both intraday and after the close yesterday. Below is a link to that study.
http://quantifiableedges.blogspot.com/2009/06/equity-putcall-ratio-suggests-down-day.html
Also this morning I added CSS Analytics to the blogroll. Rarely do I add brand new blogs to the blogroll but David has been publishing some very interesting work on some indicators he devleloped. If you haven’t already, it’s well worth checking out.
I almost showed a bullish study this morning for all the bulls who’ve been screaming for one. But when an indicator like T21112 hits a new all time high, it deserves a mention. T2112 measures the percent of stocks that are trading at least 2 standard deviations above their 40-day moving average. It set an all time-high in May and I noted it then. It went on to peak 2 days later (May 6th). After that the market experienced a 3-day pullback and a bit of a consolidation.
Monday it barely broke the old record. To provide some perspective as to how extended this indicator is I’ve shown below the full history going back to 1986.
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Spikes anywhere near what we are seeing now have been unsustainable in the past. This would seem to suggest a pullback is likely. (Of course, as the bulls will point out – there have been a lot of things suggesting that lately and the market has ignored most all of them.)
P.S. I also noticed T2112 got a mention from Cobra in his last commentary.
Below is a quick look at all the other times over the last 10 years I found where the SPY has gapped up over 0.75% from a 20-day high…
One indicator I track on the website is the Nasdaq Volume Spyx. The volume Spyx calculation is proprietary but in general it looks at relative volume across multiple Nasdaq securities. Historically, very low readings have often been followed by quick declines and high readings have been followed by quick bounces. Below is a copy of the chart from the website.
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As you can see, the -13.76 reading is quite unusual. I ran a test back to 2000 to see how the QQQQ has performed following other readings below -10.
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While instances are a bit low there appears to be a significant downside edge over the next 2 days.
The late-day selloff may have felt bearish on Thursday. One very simple study I ran last night suggested otherwise…
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The number of instances was a little bit low. These results are strongly suggestive of upside over the next few days, though. The profit factor (gross gains / gross losses) over the first 3 days is especially impressive. Also compelling is the fact that every instance saw at least 1 close above the trigger day close within the next day or two.
The last hour rally has been common lately. The last hour is often viewed as the “smart money” hour, when institutions place many of their trades. Some indicators track either just last-hour movement or 1st hour and last hour. While the market has consolidated the SPY has moved up in the last hour for 4 days in a row now. I looked at other situations like this.
One observation I explored last night was the fact that volume is decreasing not only since the March bottom, but on a year over year basis as well. July volume appears likely to come in lower than in 2008. Since the long-term trend of volume has been steadily up I decided to look at other times the market’s monthly volume had declined on a year over year basis. There were 543 months in the test and the average month gained a little over ½%. There have been 125 times where volume has come in lower than the same month the year before. Results following such months were in line with all months as a whole. I also checked to see if it mattered whether the month was positive or negative, or whether it closed at the highest monthly level in 6 months made any difference. Somewhat surprising to me, I was unable to decipher any edge, bullish or bearish, to a year over year decline in volume.
Also notable from Friday afternoon is the fact that new highs contracted substantially while the S&P made a 50-day high. The percentage of stocks hitting new 52 week high dropped from a little over 7% on Thursday to under 5% on Friday. I looked at other times the SPX made a 50-day high while the drop in new highs equaled 2% or more of the total issues.
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What I found interesting and compelling about the above test was NOT the size of the average decline. In fact that was somewhat weak. It was the fact that 95% of instances closed below the trigger day close at some point in the next 5 days. This suggests that while the lagging new highs might not indicate an immediate selloff, the market has consistently struggled to move higher.
