One bit of action I did find notable today was that the Nasdaq 100 gained over 1%, but the SOX closed lower on the day. It’s quite unusual for the NDX to put in such a strong performance without some help from the SOX. Historically this has had slightly bearish short-term implications for the NDX:
The SPX closed lower by 3% today. I’ve looked at drops of 5% or more in depth in the last few months and found there to be a tendency for a short-term bounce following such steep drops. Tonight I decided to see how drops between 2.5% and 5% have fared since the beginning of the bear market.
In these cases further downside was more common. 84% of instances closed below the trigger price at some point in the next 3 days.
The dashed line shows the average return of the S&P over the last few (in this case 3) days. The solid black line I refer to as the Differential line. It subtracts recent performance from recent expectations. When the Differential is negative it indicates the market has outperformed expectations over the last few days. A positive Differential indicates the market has underperformed expectations over the last few days.
As of last night’s close the green Aggregator was slightly below 0 and the black Differential line was squarely below 0. This means that the studies are indicating a slightly bearish bias over the next few days while the market has outperformed expectations over the last few days and is overbought. This is a configuration I will typically look for to enter short trades. A configuration to enter long trades would see both the green and black lines above 0. It’s important to note that the Aggregator is not a mechanical system. It is simply a graphical representation of my studies vs. the S&P 500.
For a free trial to the Quantifiable Edges members area and to see how I incorporate the Aggregator in my analysis simply click here.
To get a decent sample size I loosened the parameters to look at all times the S&P made a higher high by at least 1.5%. The results are below:
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.
