Blog | Quantifiable Edges | Assessing Market Action With Indicators & History

Thanksgiving Edge?

Posted by Rob Hanna in Quantitative Study November 24, 2008

I’ve often heard about the positive tendencies of the market to rally Thanksgiving week. So I ran a quick test:

The above results actually go through the Monday following Thanksgiving. Positive tendencies may have existed in the distant past, but over the 21-year period I looked at there doesn’t appear to be any edge – bullish or bearish.

The market rallied hard on Friday after hitting historically extreme conditions. There are reasons to be optimistic about some follow-through this week. Thanksgiving doesn’t appear to be one of those reasons, though.

XXXtreme

Posted by Rob Hanna in Uncategorized November 21, 2008

So every few weeks a new selloff emerges that attempts to one-up the previous selloff. I showed some tables with incredible extreme conditions on 10/9 and 10/27. And now I present…contestant #3.

Also notable is that the CBI popped up to 13 today.

The top 3 breadth stats come from Worden Bros. TC2000.

P.S. Traders may want to take a look at the charts following the previous two extreme posts.

When Studies Collide

Posted by Rob Hanna in Uncategorized November 19, 2008

Monday’s breadth study suggested a bounce was likely. On Tuesday the bounce arrived. The S&P rose about 1%. But breadth was still miserable. The NYSE Up Issue % came in at 36%. Weak breadth on an up day is something I’ve gone over before. Three such studies from the blog came on June 10th, September 11th, and October 24th. While the bullish study from last night remains valid, these three are all in conflict with it.

Frequently I’ll see studies based on different indicators conflict with each other. It’s normal. One tool I use to help me sort through the studies is the Quantifiable Edges Aggregator. It helps to provide a quantified snapshot of all I’m seeing and aids me in setting my market bias.

Having studies based on one indicator conflict with each other is not normal. In this case it’s NYSE Up Issues %. It muddies my interpretation of the given indicator and dilutes its value. It’s very rare but in such cases I simply zero out the studies. When the edge is not clear, I step aside and wait until there is a clear edge.

———————————————–

Just a quick reminder to those in the Boston area that I’ll be giving a presentation on short-term market edges tonight.

This Breadth Indicator Says We May Bounce Soon

Posted by Rob Hanna in Breadth, Quantitative Study November 18, 2008

One indicator I watch is the 10-period EMA of Up Issues / (Up Issues + Down Issues). When it gets extremely low it normally signals the market is oversold and likely to bounce. On Monday it crossed below 0.36. Below is a study showing how the market has performed other times the indicator has dropped this low.

A Past Study That’s Struggling In The Current Environment

Posted by Rob Hanna in Uncategorized November 17, 2008

An astute reader of the blog pointed out a study from March that suggested a bullish bias when there was two 3.5% up days within a 10-day period. The bullish bias did play out in March as the market rallied over the ensuing weeks. Since then the setup has triggered on 9/19, 10/13, and 10/28 – all of which have been miserable failures. One issue when considering this study in the current environment is that 3.5% isn’t a substantial move.

As I discussed in Thursday’s blog, the average true range percent in the Dow over the last 30 trading days has been over 6%. That’s not to say that Thursday’s reversal bar isn’t a positive one. Things to look for generally include a strong move higher, strong volume, and strong breadth. Thursday qualified in all areas. Against the current backdrop I’ve been looking for a bit more confirmation. Tests have been mixed.

5% Up Days

Posted by Rob Hanna in Quantitative Study November 14, 2008

I recently looked at one-day selloffs of over 5% and found them to have an upside edge. Tonight I looked at rallies of 5% or greater. For the S&P the sample size is small but there has been a bit of a downside bias since 1960:

Of the 11 instances, the only one that didn’t close below the close of the 5% day within the next 4 days was the 5/27/70 occurrence.

Listed below is the one-day performance following all 5% up days for the S&P 500.

A couple of things to note: First, 8 of the last 9 have closed lower. Second, the lower closes have generally been tame – both in relation to the 5% up day and compared to the instances that continued to rise the next day.

The Most Volatile Market Environment…Ever?

Posted by Rob Hanna in Quantitative Study November 13, 2008

In my last post I looked at the increased volatility based on the size of the average overnight gap in SPY. Today I’ll examine the current market’s volatility based on its Average True Range Percent.

In the chart below I show the Dow Jones Industrial Average from 1986 – present. The yellow line represents the 30-day average true range on a percentage basis. The average true range over the last 30 days closed at an astonishing 6.02% on Wednesday.

It appears the only time since 1986 where it has come close the current 6% level was during the Crash of ’87 period when it poked just above 6. In actuality, though, the comparison isn’t quite fair due to the way the range was calculated previous to 1992. From Investopedia:

Theoretical Dow Jones Index
A method of calculating a Dow Jones index (most often the DJIA) that assumes all index components hit their high or low at the same time during the day.

In other words, the “theoretical Dow” uses the daily highs for all 30 Dow components to calculate the index high, and the lows to calculate the index low. In January of 1992, Dow Jones started using the “actual” method, which calculates the index at 10-second intervals throughout the day. Before this point, the theoretical calculation was the only way to compute the high and low of the index. This method assumes that all stocks hit their high or low at the same time. Because this rarely happens, the theoretical high will almost always be higher than the actual, and the theoretical low will almost always be lower than the actual.

Taking the pre – ’92 exaggerated range into account, it appears almost certain that the recent market has displayed a higher Average True Range % than 1987. Going back further in history, the only other period where ranges approached these levels were…the 1930’s.

Even during this period the only time where the average true range percent got much above 6% was following the Crash of ’29 when it hit nearly 7%. Since the ranges were exaggerated due to use of the Theoretical Dow calculation, it’s possible that the current environment may actually be the most volatile.

You may notice from the charts that the spikes in volatility tend to occur near market bottoms. An ATR spike can alert you that a bottom may be coming. Like many indicators that use moving averages, though, the 30-day ATR% is a lagging indicator. It typically peaks after the bottom has been made. Look for this measure to turn down again once a bottom (at least a temporary bottom) is in place.

A Long Term View Of Average Gap Sizes

Posted by Rob Hanna in gaps November 11, 2008

Another 2% gap today. For those that feel 2% gaps are becoming the norm – they are. Below is a chart that shows the 50-day absolute average gap of the SPY. Over the last 50 days prior to this morning the average gap had been 1.87% (in either direction). This is nearly twice as large as any other time since the SPY began trading in 1993. First, the chart. Then a few remarks.

1) Notice how prior peaks in the size of the average gap have coincided with bottoms in the market.
2) The fact that we are nearly twice the level of any prior history once again speaks to the unique and extreme nature of the current environment. This can’t be stressed enough.
3) Prior studies I published on gaps that used static assumptions for gap sizes may need to be reworked for the conclusions to be meaningful in the current environment.

Friday Was Another Low Volume Rally

Posted by Rob Hanna in Quantitative Study, volume November 10, 2008

The market rallied nicely on Friday but volume came in quite a bit below the previous few days. Strong up days on low volume have been creamed lately. A few recent examples would include 9/30, 10/13, 10/20, and 11/4. The table below shows results following all one-day gains of 2.5% or more that were accompanied by volume under the 10-day average.

Much more on this study was published in last night’s Subscriber Letter. If you haven’t yet trialed it then simply email QuantEdges@HannaCapital.com with your name and email address an I’ll send you last night’s Letter along with 3 upcoming ones.

Down Another 5% – History Being Made Again

Posted by Rob Hanna in Quantitative Study November 7, 2008

Yesterday I looked at how the S&P has responded following drops of 5% or more. Most often is has led to a bounce. Thursday failed – and in a big way as instead of bouncing it fell another 5%. The only time going back to 1960 that the S&P has fallen 5% for 2 days in a row was during the Crash of 87.

Since my Dow history file goes back to 1920 I decided to look at that. There have been 4 times that the Dow dropped 5% or more 2 days in a row. They were all between 1929 and 1933.

Of course the Dow didn’t drop 5% on Thursday. It did drop over 4%. So I loosened the parameters to 4%. Results below:

There appears to be a bullish edge over the 1st two days. After that it dissipates. One of the instances included above was the Crash of 1987. The rest of them all took place between 1929 and 1940.

I can’t even count how many tests I’ve run over the last month whose results came up “1987” or “between 1929 and 1940”.

I’ll Be Speaking In Boston On November 19th

Posted by Rob Hanna in Uncategorized November 6, 2008

For those readers who happen to be in the Boston area I thought I’d let you know that I will be giving a presentation at the next Boston Investors’ Business Daily Meetup Group meeting on Wednesday, November 19th. I’ll be discussing short-term market behavior and edges.

The meeting will take place at MIT. It is free and open to the public, although the organizers request that you RSVP. More information may be found using the link below:

https://www.meetup.com/BostonIBD/calendar/9059814/

I hope to get to meet some of you there.

5% Drops Often Followed By Rebounds

Posted by Rob Hanna in Quantitative Study November 6, 2008

I looked back at all prior 5% drops in the S&P 500 since 1960. From 1960 until 1987 there weren’t any. Since 1987 there have now been 14 of them. The November 5, 2008 drop was the 6th 5% drop since early September. Generally these large drops have been followed by a bounce at some point over the next few days. I show all instances since 1960 in the table below:

Of the 13 instances, 10 closed higher the following day. If you give the trade 4 days to work then 12 of 13 closed higher than the entry at some point. The lone loser was October 16, 1987. That date is notable because it was the Friday prior to Black Monday.

VXO Suggesting A Pullback Is Likely

Posted by Rob Hanna in Quantitative Study, VIX November 5, 2008

I’ve discussed in the past that it is a common misconception that a low VXO is a bearish indicator. When the VXO becomes extremely stretched, as it is now, then that changes.

Instances are a little low, but both winning percentages and Win/Loss Ratio are very suggestive of short-term bearish implications. Also of note is that 18 of 20 instances (90%) closed lower at some point in the next 3 days. There was only one instance that failed to close lower than the entry at some point in the next 7 days. That instance was 10/19/98 which essentially traded sideways for 7 days before beginning a new leg up.

Election Edges?

Posted by Rob Hanna in Quantitative Study November 4, 2008

Today I give you some political stats:

First I wanted to see if there was general excitement about the new guy. In other words, there is not an incumbent victory…

Nothing terribly exciting here. Pretty much 50/50 over the next week.

Next I broke it down by party and ran the stats out a bit further.

Since 1920 this is how the Dow has performed after a Republican has won the white house. (I excluded 2000 since no one knew if a Republican or Democrat won for a long time after the election.)

Still not much better than 50/50 until you get out a couple of months.

Now lets see what has transpired after a Democrat wins:

A big Day 1 is apparent here, which could bode well for Wednesday if Obama wins. Beyond that – not much noteworthy. You’ll note that 40 days out the Democrat and Republican return is about the same.

No huge edges here. I’m likely done with this study for at least 4 years.