With 2008 performing so bad, I decided to see how other years started off based on the prior year’s performance. Most often the 1st week of the new year following bad years in the stock market has done quite well – and substantially better than 1st weeks coming off positive years:
With market action slow over the last week I thought I’d address a question I received about 401k timing and RSI(2). From David recently:
“Could 2 period RSI be used to produce better dollar cost averaging returns in a 401k?Instead of doing 401K contributions on 15th and 30th of every month, what do you think of having the contributions go into a money market account, and waiting for the next RSI
I ran a test from 1/1/98 to sometime last week. If someone placed $100 into their 401k twice a month for the last 11 years the total invested would be $26,400. (I used the 1st day of the month and the 1st trading day after the 14th for simplicity.)
If their returns matched the S&P 500 that $26,400 would now be worth $19,748.34.
If instead of investing the $100 on or about the 1st and 15th, the person decided to enter on pullbacks to where the 2-period RSI was below 20, the $26,400 would now be worth $19,777.66.
In other words 11 years worth of effort would have made them an extra $30.
The issue is they are only making $100 trades the entire time. $30 isn’t great but it isn’t terrible when you’re only trading with $100.
The lesson here is that trying to time the entry of your money into your 401k is a waste of time. If you are going to boost your returns you need to focus on trading the account.
Measures of volatility I provide charts of in the subscriber’s section of the website include the Absolute Average Gap of the SPY and Nasdaq. The current chart for the SPY may be found below. Note how it has gone from extremely volatile relative to the norm to extremely muted.
Taking a broader view of this indicator I broke it down by times the 10-day exceeded the 100-day average absolute gap and times the 100-day exceeded the 10-day. When the 10-day has exceeded the 100-day (signifying the market has been subject to gap more than usual as of late) the average 1-day return for the SPY was 0.027% . When the SPY was gapping less than usual (the 10-day was less than the 100-day) the average 1-day SPY return was 0.018%. In other words the market has performed 50% better following periods when is has been more gappy than average vs. times when it’s been less gappy than average.
With only two trading sessions left until Christmas, we are now in a seasonally strong period for the market. Below is a breakdown of the last 21 years and how the S&P has performed from this point forward.
The next 1 to 5 days have been especially bullish. If you decided to buy the close 3 sessions before Christmas and then sell the 1st profitable close after entry then 18 of 21 trades would have been winners within 2 days and 20 of 21 within 5 days.
On the front page of the website I currently show the S&P 500 Volume Spyx chart every night. Subscribers also see the Nasdaq Volume Spyx chart. (More information on Quantifiable Edges Volume Spyx indicators are available here.)
Below is a copy of Friday’s chart. The -18.66 reading is extremely low.
Also interesting is that the worst 6 weeks was down less than 11%. This suggests a trading range may be more likely than a runaway move up or down.
To baseline the results a little bit I also looked at 50ma crosses when the S&P hadn’t spent at least 50 days below the average:
As I did with the 200/50 quadrant tests, I first broke the performance down by the number of points gained or lost from 1960 – present. (Click on any table or chart to enlarge.)
At first glance the numbers should look surprising. The most points gained have come following days where the market closed below both its 50 and 10-day moving average. Don’t bother thinking too hard about these numbers. They lie. The reason they are able to lie is that the results have changed dramatically from the 60’s and 70’s to the last 10 years (when the level of the S&P has been much higher). To illustrate this I will break down the performance using a set $100k/trade rather than S&P points. Below are equity curves broken down by quadrant as I did for the 200/50 a couple of weeks ago:
First let’s look at performance above both the 50 and 10-day moving average:
The next chart shows performance after the S&P closes above the 50 but below the 10-day moving average.
During the 60’s and 70’s this was not a place to be buying. Since the late 80’s this quadrant has generated some nice returns. The shape here is again somewhat reminiscent of the 200/50 chart of the same quadrant.
Now quadrant 3 – Similar to 2 weeks ago this is where the market has spent the least amount of time.
Again somewhat similar to the last test. This quandrant has done fairly well historically – mostly as the market emerges from below. The last two bear markets have seen some steep losses from this area, though.
A few quick observations to take from the above:
1) Whether using the longer 200/50 moving averages or the 50/10 moving averages the results look fairly similar.
2) It’s been a good 10 years since chasing strength worked and a good 20 since it’s worked well.
3) Pullbacks in uptrends have provided the best long-side opportunities over the last 20 years.
4) During vicious bear markets like the current one, buying below the 50-day moving average can be a difficult and dangerous endeavor. (See quadrants 3 & 4.)
Last night I looked at all times since 1982 the S&P 500 rose 1% or more on a Fed day and closed at a 10-day high:
The edge isn’t as prevalent initially, but over the next 2 weeks a downside tendency can be observed. Not shown above is that 70% of all instances closed below the close of the Fed day within the next 3 days. While this isn’t one of the strongest edges we’ve seen, it does suggest a pullback is the odds-on play. I also thought it was worth adding to the Fed Day Studies.
Tuesday could see some sharp moves thanks to the Fed. I’d encourage readers to review some of the Fed studies I’ve posted previously. One thing to keep in mind is that strong reactions to the Fed can often be faded over the next few days.
I got Larry Connors new book, “Short Term Trading Strategies That Work” in the mail yesterday and have read most of it. While a good portion of it has been covered by him before either in other books or on the TradingMarkets site, there are a few new ideas in there. If I can take one idea from a trading book and easily test or apply it to my own trading then I consider it worthwhile reading. This book has more than one.
There was a chapter on the RSI(2) that was quite interesting. I was pleased to see his findings were similar to Michael Stokes recent findings as well as Damian Roskil’s. Others who have published useful information on RSI(2) include Woodshedder, BHH at IBDindex, and Dogwood.
No doubt traders will hear about a possible “Santa Claus Rally” many times in the next few weeks. When looking at the S&P 500, though, I found the best week in December to be option expirations week. The edge has been especially pronounced over the last 24 years. During that period the market has closed the week higher about 81% of the time.
The market posted a Follow Through Day again last week. This is at least the 6th Follow-Through Day since the 2007 top. New blog readers may want to check out the series of studies I’ve written on Follow-Through Days (FTD’s) to gauge their usefulness.
There are some issues a trader would have if they used a FTD as a market buy signal. (This is not the recommended use by IBD, but does help to determine the predictive power of FTD’s when conducting studies.) One issue is that they tend to commonly fail during difficult bear markets.
Several weeks ago in the Subscriber Letter I posted a study which looked at FTD effectiveness following the Crash of ’29. (This study only looked at the Dow.) Below is an excerpt from that Letter:
I thought it would be interesting to see how FTD’s performed following the 1929 crash. As a brief reminder, “success” for a FTD would entail either 1) The market making a new high or 2) a rally from the close of the FTD that equals at least twice the distance from the low to the FTD. Below are charts spanning the period from 1929 to in 1932.
In this chart we see several failures and one FTD that led to a rally meeting its target. While it didn’t meet the definition of success, the rally in the early part of 1930 was actually the best over the time period.
Next is ’31 – ’32:
Plenty more failures are seen here before the market finally bottoms in mid-1932. All told there were 13 failed FTD’s and one successful one before the 1932 bottom arrived.
A FTD is a positive sign when looking for a potential market bottom and subsequent rally. The current rally attempt may succeed. The market certainly seems overdue for a substantial and sustained rally. FTD and other bottoming signals have proven far less reliable over the last year. There have been a few other times where they have struggled as well. The period above is one example. Just something for the back of the mind as the current rally attempt unfolds.
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Anyone who would like to purchase the FTD code for their own testing may do so here.
A note to blog readers: I will be out of action most of this week. There may not be any other posts until next week. Fear not. I shall return to the blogosphere next week with a vengeance. – Rob
A note to Gold & Silver Subscribers: I completed implementation of a new distribution system. I believe everything is working fine. If you did not receive tonight’s Letter, please contact me ASAP.
A quick look at the S&P 500 Volume Spyx chart below (and available each night on the home page) shows that while the market rallied on Tuesday and Wednesday the Spyx level rose. This is in contrast to other recent rallies where the Spyx fell as the market rose. This is potentially a good sign. Let’s look at the volume Spyx pattern in detail to see why it may be a positive. Then I’ll offer my thoughts at this time and also compare it to standard volume patterns. (Those not familiar with Volume Spyx may click here to learn more.)
First, below is a table showing data when a two-day market rise occurs with increasing Spyx levels:
While not overwhelmingly bullish, there is a clear upside edge over the next 1-10 days based on this pattern – especially day 1. The average day over the entire time period only gained $24, so the difference is substantial.
Now let’s see what happens when only 1 of the days occurs with a rising Spyx:
Very choppy action with a slight negative overall tilt.
What if the Spyx sinks both days while the market rises?
Results here are quite a bit worse on average. It’s still close to a 50/50 proposition but risks clearly outweigh rewards.
I did look at how the 1st (bullish) test has performed over the especially choppy and bearish period from 6/1/07 to now. Over this time there have only been 4 instances and results were split. As challenging as the current market is I’m not prepared to view the results in a clearly bullish light. I do think it’s better than seeing either of the alternatives though.
Lastly, I took a look at running similar tests using straight volume instead of the Quantifiable Edges Volume Spyx to see if it provided the same edges. First I present the “bullish scenario” with two up days on rising volume:
What if we look at the bearish Spyx scenario using volume as a substitute?
Rather than clear downside edge what we have here is again less pronounced. The suggestion is chop rather than true downside.
Several times lately I have substituted Volume Spyx levels for actual volume levels in testing patterns and found the edge to be more pronounced. The S&P 500 volume Spyx is updated each night on the home page. It can be viewed for free. Gold level subscribers are able to download historical data on both S&P 500 and Nasdaq Volume Spyx Levels each night for research or further evaluation.
While the market once again struggled mightily in November, the volatility made for some nice opportunities for Gold Level Subscribers. Once again this month Quantifiable Edges proprietary Catapult trading strategy which underlies the CBI was best able to take advantage of environment. It was designed to prosper under extreme selling conditions. It has performed exceptionally well the last 2 months with big gains also coming in October.
About a month ago I showed how the S&P 500 has performed following days where the market dropped 5% or more. In most cases such a strong reaction was an overreaction and the market closed above the close of the 5% drop day shortly thereafter.
Since I showed that table a month ago we have had SIX more 5% drops. Five of the six saw the same pattern with some kind of bounce in the next few days. Below I’ve updated the table which lists all 5% drop days and whether they closed above the 5% drop day close in the next week.
