Blog - Quantifiable Edges

A 20% Rally In Under 2 Weeks

Posted by Rob Hanna in Uncategorized March 19, 2009

The current rally has seen the S&P 500 rise over 20% above its recent lows. I looked at other times back to 1960 where the S&P rose 20% or more within a 2-week period. There have only been 3 other instances: November 2008, October 2008 and Following the Crash of 1987.

While the Dow hasn’t managed a 20% gain yet I did use it to look back to 1919. There was only one other period where there was a cluster of multiple rallies of 20% or more in 10 days or under. That period was 1931-1933. Below is a chart of the period. I’ve noted every 20% 10-day rise with a buy signal. The sell signal occurs 20 days later so you can more easily see how it performed after the rise.

Short-term results were mixed. As a whole this was a horrible time for both the stock market and the economy.

When The S&P Is Overbought Going In To A Fed Day

Wednesday is an FOMC meeting. In the past I’ve produced numerous studies examining how the market has performed surrounding these meetings. One scenario I have not yet shown is how the market has performed when it is short-term overbought go into the meeting. For this test I used a 2-day RSI to measure different levels of overbought.

(click to enlarge)

Over the last 19 years when the market has had positive momentum going into a meeting it has most often been able to maintain that momentum through the day of the announcement.

When SPY Gaps Up 1% And Closes Negative

Posted by Rob Hanna in Quantitative Study March 17, 2009

What stood out to me about Monday was the fact that the market gapped higher by such a large amount and failed to close positive on the day. Below I look at other times the SPY gapped up 1% and finished negative.

While instances are a bit low, additional downside follow through was often seen over the next 1-3 days.

Tweetdeck for Traders

Posted by Rob Hanna in Uncategorized March 15, 2009

Twitter has been increasing in popularity as an application for bloggers.

Dr. Steenbarger of Traderfeed produces invaluable information for traders through Twitter. He supplies followers with not only links, but proprietary indicator updates and real-time analysis and observations.

Jeff Pietsch from Market Rewind also sends out real-time market observations on Twitter.

Personally I’ve subscribed to both services via Twitter, and Dr. Steenbarger’s Twitter service through the RSS feed. The frustration I’ve experienced in following them is that even with an RSS feed the Twitter update may not arrive for an hour or so. And even then I’ll only notice it if I happen to flip over to my reader application. Trying to follow real-time commentary on a much delayed basis just doesn’t provide the same value. This is no fault of theirs as the information is good and timely.

This all changed recently. Why?

I discovered Tweetdeck. Tweetdeck is a free beta application that updates and organizes Twitter feeds that you are subscribed to. It updates once per minute and can be set to notify with a tweet sound and popup when a new tweet arrives. It makes manually refreshing Twitter or subscribing to an RSS feed obsolete. I’d strongly recommend everybody check out the free twitter services from Dr. Steenbarger and Market Rewind. And with Tweetdeck you’ll have real-time insight from some terrific intraday traders.

If Twitter updates aren’t enough you should also note Market Rewind just started a chat feature accessible from his main page.

Other worthwhile Twitter feeds to follow are Corey at Afraid to Trade and Greenfaucet – though neither are quite as dependent on real-time up to the minute information.

I’m admittedly no expert on Twitter. I’ve never sent a tweet and have no plans to offer any such service. If anyone knows of other valuable tools or services that could be incorporated with Twitter I’d encourage you to post about them in the comments section.

Subscriber Letter Trade Results For February

Posted by Rob Hanna in Subscriber Features/Letter March 14, 2009

So I finally got around to putting together the stats for February for the Subscriber Letter and have included them below. There are very few trades that were closed out in February. There were several active ones that didn’t get closed out until March. For simplicity I’ve always just reported the closed trades. I see no point in marking to market at the end of each month and running complex stats. Reason being this is NOT a performance report. No allocation sizes are suggested and the trade ideas are not presented as a portfolio, but rather a list of actionable ideas that I track. The February results were once again excellent. March got off to a rough start with a couple of individual trades. This week has been good but there’s a decent chance it may have the first negative total since last August. I’m getting ahead of myself, though. Below are some of the usual caveats followed by the February summary results.

As mentioned above, I don’t suggest position sizes. The primary reason for this is I’m not acting as a financial advisor. I don’t feel it is appropriate to suggest allocation sizes without understanding someone’s financial situation and risk tolerance. Even for my own trading I run different portfolios with different levels of aggressiveness. For instance, my most aggressive portfolio is my IRA. Here I may use options to sometimes get 400-500% leveraged. Other portfolios on the other hand normally take much more conservative stances and some rarely reach or exceed 100% exposure.

Since I don’t suggest position sizes this is should not be considered a performance report, but rather a trade idea scorecard. Therefore, no matter how objective I try to be the reporting of the results is always going to be skewed depending on how you approach the trades. For instance, I always recommend scaling into the Catapult positions in 3 parts, whereas the “System” trades (whatever system I unveil other than Catapult) are normally one entry. The “Index” trades I normally recommend scaling into as well. For my own trading I trade much larger size with the index trades than any of the individuals. I also control my exposure by limiting the total amount invested per day. As I mentioned, this will vary depending on the account I’m trading. My most aggressive account I may put in up to 100%/day and get heavily leveraged using options. A more conservative account may max out at 15%-20% per day.

It’s unlikely anyone would have taken all of the trades with equal amounts, so personal results would vary greatly depending on the trader’s approach. Simply adding up the results of the individual triggers as I do below is an admittedly poor representation of returns. A net positive or negative does not necessarily mean a person following the ideas would have made or lost money during the period measured. And the sum total is certainly not representative of what a portfolio would return. All that aside, below are February’s results (click to enlarge):

Detailed trade by trade results will appear in this weekend’s Subscriber Letter. If you haven’t checked out the gold membership area yet, then click here to sign up for a free trial (only a name and email address required). It’s not just trade ideas. It contains research far beyond the blog as well as members-only charts, systems (with code included), and custom indicators.

2nd 90% Day Suggests Real Strength

Posted by Rob Hanna in 90% days, Quantitative Study March 13, 2009

Thursday the market again posted a day where 90% of the volume went to the upside. This follows Tuesday’s 90% up day. I looked back to 1970 at other times the market put in 2 90% days in a 1-week period. Instances are small, so it’s dangerous to rely too much on the results, but you’ve typically seen very strong moves after these tandems of 90% Up Volume days. Below I’ve listed all the occurrences along with the 20-day return of the market after such occurrences. (Results based on $100k per trade.)

It’ll be interesting to see which 90% study wins out (click here for other 90% study from 2 days ago). While a short-term pullback seems likely here soon, I am seeing more indications of further strength than I am weakness.

CBI Drops to 3 – Now Neutral

Posted by Rob Hanna in CBI March 12, 2009

In my March 3rd post I noted my Capitualtive Breadth Indicator (CBI) rose to extreme territory. It hit 12 on the afternoon of March 2nd and peaked at 18 the next afternoon. I showed a simple system in that post that went long on a reading of 10 or higher and then exited when the CBI closed at 3 or lower.

At around 10:25 this morning the CBI dropped back to 3. Barring a huge move south for certain stocks it appears likely to close the day at 3 or 2. This would be the exit signal for the system that was described. Should the S&P manage to close above the March 2nd close off 700.82, this trade would end up a winner (up about 4.5% as I type – edit – +7% by the close).

A CBI of 3 or lower is considered neutral. There is no level for shorting. The low CBI simply means the number of stocks with potential rebound energy from capitualtive selling is small. It doesn’t neccessarily suggest the end of the rally. It does mean that further gains are not helped by the bullish implications of a high CBI reading.

Why Tuesday’s 90% Up Day May Not Be Bullish

Posted by Rob Hanna in 90% days, Quantitative Study March 11, 2009

Lowry’s has shown 90% days to be effective in determining market bottoms. For those who are unaware a 90% day is a day where volume and points are 90% one directional. A 90% up day would occur when 90% of the volume traded and points traded on the NYSE are to the upside.

Tuesday was a 90% up day. Lowry’s looked for cluster of them in order to determine a bottom. (You can find a free copy of their report Identifying Bear Market Botoms” here.) Unfortunately, I’ve found 90% days coming directly after a bottom tend to lead to market weakness. For the below study I ignored the points qualification and just looked for 90% up volume days.

(click to enlarge)

Both 1 and 8 days later all of the instances saw the S&P trading lower. Interestingly, while the test went back to 1970, 6 of the 8 instances found have occurred in the last 2 years. Prior to that it was unusual for a 90% day to occur directly following a low.

Light Volume Bottoms Study Part 2

Posted by Rob Hanna in Quantitative Study, volume March 10, 2009

In the March 6th blog I showed a study that looked at 50-day lows occurring on heavy volume (highest in 5 days) and light volume (lowest in 5 days). A 50-day low on light volume was found to be significantly more bullish. On Monday the market made a new low on the lightest volume in 5 days.

Unfortunately when I went through some of those studies Monday night I realized something quirky was happening in Tradestation. I had run them using imported volume data that went back to 1992. I also ran them on the Tradestation volume data from 1992 – present. I did this to check and see that the sets were similar. Upon finding they were I removed the 1992 – present restriction and looked back from 1960 – present. When I did that for some reason the tests ran improperly and they continued to only look back as far as 1992. There’s good news and bad news associated with this. The bad news is that when looking back further the numbers aren’t quite as enticing. The good news is that with a larger data set I was able to examine 200-day lows as well.

So here are the 50-day low numbers all the way back to 1960. First looking at high volume:

(click on any table to enlarge)

Still an edge, although a bit weaker from an Avg Trade standpoint. The last 16 years or so that were looked at last week have done better than the long-term average.

Now let’s look at low volume.

The edge here again isn’t nearly as pronounced when looking across the longer period as it was from 1992 – present. It is still quite a bit better than the high volume scenario though.

With the added data I was able to run 200-day moving average data back to 1960 as well. Again I’ll show the high volume scenario first:

Not much of an edge here. Perhaps a slight upside tendency. Next is again the low volume setup, but now using the 200-day low.

Here the edge appears fairly solid. When I looked at it in more detail I found that the bullish edge really began to exert itself around 1977. Below is a test only going back that far:

Instances are a little light but the results here are very strong.

Can The Market Bottom On Light Volume?

Posted by Rob Hanna in Quantitative Study, volume March 6, 2009

One common misconception about steep selloffs is that they need to be accompanied by high volume in order to mark a bottom. October 10th and (to a lesser degree) November 20th, 2008 are two examples of big down days that came on big volume that soon led to a reversal. While this pattern can precede a bounce, you’d much rather see your new low accompanied by very low volume than very high volume.

Let’s look at some studies to illustrate this claim. First let’s look at performance following a 50-day low that has neither very high nor very low volume: {edit: the following tests were inadvertently run from 1992 – present, not 1960 – present. See March 10th follow-up blog for more details and longer-term results.}

(click to enlarge)

So this is the base case and as you can see there is a slight upside edge over the next 1-20 days.

Now let’s look at the ever-popular high volume selloff:

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Results here are nearly indistinguishable from the base case. The high volume, while not a deterrent, does not seem to provide an additional edge.

Now let’s look at the less common case of a 50-day low occurring on light volume:

(click to enlarge)

While the number of instances is less than desired these results are clearly superior to the other scenarios. Over 90% winners after both 4 days and once you get out over 3 weeks. The average trade over the next week and over the next 4 weeks is about 4 times the size of the base case. While they didn’t all mark the exact low, some success stories included 10/7/02, 3/10/03, and 1/24/05.

There are plenty of technical reasons we should see a strong rebound soon. Thursday’s light volume can be added to the list. Now let’s just hope the market stops ignoring these reasons.

Breadth Indicators With Confirming Extremes

Posted by Rob Hanna in CBI March 4, 2009

Yesterday I noted my Capitulative Breadth Indicator (CBI) spiked above 10 up to 12. On Tuesday the number reached even higher to 18. Eighteen is an extreme reading that has only been reached during 5 other periods since 1995.

Before I show those dates I want to mention another breadth indicator I look at which also measures oversold breadth. Worden Bros. T2114 and T2116 measure the % of stocks trading 1 and 2 standard deviations below their 40-day moving average. Both are in extreme territory at the current time. T2114 (1 standard deviation stretch) is reading almost 87% currently. Data is available back to 1986. Since then there have only been 6 other periods where similar levels were reached.

Below is a table comparing the CBI>=18 to a Worden Bros. T2114 > 85:

Both indicators are now at similar extremes only reached during some sharp selloffs that resulted in sharp rebounds.

CBI of 12 Suggests Bounce is Near

Posted by Rob Hanna in CBI March 3, 2009

I’m beginning to see some indicators hit truly extreme readings – most of them breadth indicators. One indicator I track that finally spiked up to an extreme reading Monday is the Capitulative Breadth Indicator (CBI). It now stands at 12 and could spike quite a bit higher on Tuesday if the market fails to rally. I’ve discussed in the past that there is a strong bullish edge when the CBI moves over 10. A “system” I’ve discussed in the past is buying the S&P when the CBI reaches 10 or above and then selling when it returns to 3 or lower. This system was perfect from 1995 until July 2008. In July it suffered its 1st loss and in October it suffered its 2nd loss. November spike above 10 nailed the bottom and turned into the a 19% gain – the biggest ever for the system. Some detailed statistics are below ($100k/trade, 1995-present):

The CBI is one indicator suggesting a bounce is near.

For more detail on the CBI, click the label below or click here to read the intro post.

My Take On The VIX

Posted by Rob Hanna in Quantitative Study, VIX March 2, 2009

Another big day down today and still the VIX isn’t stretched. An observation I’ve seen several traders make is that while the S&P fell hard last week, the VIX (and VXO) didn’t rise. The interpretation by some is that this suggests a lack of fear and is short-term bearish. I was unable to find evidence to support this theory. Below is one test I ran that looked at other times the S&P fell at least 2.5% while the VXO also fell.

I wouldn’t call the results bullish but I wouldn’t call them bearish either. I would suggest that perhaps the VIX is simply an indicator lacking a solid edge for the time being.

Bank Action And The Market

Posted by Rob Hanna in Uncategorized February 27, 2009

The one sector that held up very well Thursday was the Banking Index (BKX). Yesterday I showed a study that suggested a bullish bias following a negative SPX day where the SOX thrives. Below is a similar test using the BKX instead of the SOX:

(click to enlarge)

This study would have triggered both on Wednesday and Thursday. Instances are too few here to draw any solid conclusions. It does appear worthwhile to keep an eye on the BKX as well as the SOX, though. Interesting about this study is that there were two occurrences in 2008. They were on 1/22/08 and 10/10/08. Both near notable market lows.

Edit: Citigroup is trying its best to ruin these results as I type this. Expect the banks to remain front and center. Looks like we’ll have another action filled day.

SOX Gives Intermediate-Term Bullish Market Indication

Posted by Rob Hanna in Quantitative Study February 26, 2009

A positive intermediate-term sign Wednesday was the fact that the Semiconductor Index (SOX) rose even as the S&P and Nasdaq suffered 1% declines. I first showed the below study on the blog last August. I’ve updated the stats to run up until the present.

(click to enlarge)

These are solidly bullish results with the winning percentage, the profit factor, and the average trade all posting strong numbers throughout the test period.

Not shown above is that over the next week the S&P has posted a close higher than the trigger day close 89% of the time. If you look out 12 days there has been at least 1 close higher than the trigger day in 42 of 43 instances (98%). The only loser came after the 7/21/98 signal. This has been a solidly bullish intermediate-term signal.