It’s been a while since I’ve talked about the day-after options expiration, but this particular oddity might be a changin’.
When is options expiration day?
Equity and index options expire after the close of trading on the third Friday of every month. When the third Friday is a holiday, they expire on Thursday. The “day-after options expiration” then is usually the following Monday.
My previous posts here and here on the topic could be summed up as: the day-after options expiration (Monday) has historically been very bearish when expiration day (Friday) was down, but neutral when expiration day was up. To illustrate…
[Growth of $10,000, logarithmically-scaled]
The graph above shows the results of three “strategies” trading the S&P 500 index from 1970.
The first (blue) made twelve one-day trades per year, from the close of each expiration day (Friday) until the close of the day-after (Monday). This is our benchmark day-after options expiration day. The second strategy (green) only took that position when expiration day was up, and the third (red), only when expiration day was down.
Geek note: this is a proof of concept so these results are frictionless (i.e. do not account for transaction costs and slippage) and ignore return on cash.
Clearly, from 1970, the day-after options expiration has been very bearish when the market fell on expiration day (red), but only neutral when it rose (green).
But notice what has happened more recently towards the right hand of the graph above – the difference between the red and green lines has all but disappeared. The next graph shows the same results as the first from 2000…
[Growth of $10,000, logarithmically-scaled]
In more recent history, there’s been little difference in day-after options expiration returns based on expiration day – they’ve both been about equally bad.
In fact, in the last year or so, the observation has actually reversed with positive expiration days leading to the most bearish returns (but I think that that’s too few observations to take seriously…yet).
In Summary…
For most of the market’s history, negative monthly expiration day returns beget negative returns the following day, and positive expiration days beget neutral returns. But more recently, that difference has disappeared and both are now about equally bearish.
Three random closing thoughts: (1) Perhaps this is related to the evolution in daily follow-through (read more here and here) which seems to have occurred at roughly the same time? (2) This could very well just be a fluke in the data – note other periods (ex. mid-80’s) where positive and negative expiration days were also about even. And (3) this is another example of why adaptive approaches to trading are so important…the State of the Market report (which includes the day-after options expiration) caught on to this change and adjusted its predictions long before I snapped to it.
Happy Trading,
ms
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Filed under: Options-Expiration, Time-based, Trading Strategies | Leave a Comment
This is the fourth contribution to the MarketSci Blog from Andrey S. of Russia (along with the trading nuggets here, here, and here).
In this post, Andrey shows that, like India, day-to-day changes in the Russian stock market behave opposite of the US: they are momentum, not contrarian driven. This has huge consequences for all short-term indicators, such as blogosphere fav RSI(2).
A simple illustration…
[logarithmically-scaled]
The graph above shows the results of two trading strategies: one going long Russia’s RTS Index at today’s close if the market closed up today (green) and the other if it closed down (red), from 1996.
Geek note: this is a proof of concept, so these results are frictionless (i.e. do not account for transaction fees or slippage). Also, I’ve used the version of the index denominated in US Dollars (more on this in a bit).
Obviously, the Russian market demonstrates tremendous daily follow-through; up days tend to be followed by up days, and vice-versa. But recall that this is the exact opposite of what we see in the U.S. today (read more here and here) where short-term movement is very much contrarian; up days tend to be followed by down days, and vice-versa.
A different view…
[logarithmically-scaled]
The graph above shows the same data in a single “portfolio”, assuming we traded long following a close up, but short following a close down (frictionless).
There are two oddities about the results above: (1) the bend in the equity curve where I’ve placed the red arrow, and (2), very different results over the last year or so when viewing the index denominated in Rubles (rather than USD). More on both of these oddities in part 2 of this post.
Happy Trading,
ms
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Filed under: Follow-Through, International Markets | 6 Comments
Just a little housekeeping. This is a roundup of our recent posts talking about the Golden Cross (aka 50/200-day moving average crossovers).
>> Moving Average Crossovers Debunked?
Our original (long ago) post on 50/200-day (and 10/50-day) moving average crossovers.
Conclusion: longer-term MA crossover strategies like these aren’t particularly great for producing outsized returns, but they have done a fairly good job at protecting investors from protracted downturns.
>> Which Golden Cross is the Best Golden Cross?
A look at EMA vs SMA golden crosses (two different flavors of moving averages).
Conclusion: the SMA variation has performed a small bit better historically, but the difference isn’t significant enough to get worked up over.
>> Testing the Rare Downtrending Golden Cross
A look at golden crosses that occur when the 200-day SMA is still falling.
Conclusion: downtrending (falling 200-day SMA) golden crosses have historically been about as bullish as any other.
>> The Golden Cross and Dow Jones Transport Confirmation (Trading DJIA 30)
How the golden cross has performed with and without confirmation by the transportation index.
Conclusion: waiting for confirmation from transports hasn’t hurt or helped performance of the golden cross much, but has significantly reduced exposure (time in market) – an inherently good thing.
>> The Golden Cross and Dow Jones Transport Confirmation (Trading S&P 500)
Same test as the previous report, but trading the S&P 500 rather than the DJIA 30.
Conclusion: same conclusion as well…more or less the same performance, with a lot less exposure to the market.
Happy Trading,
ms
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Filed under: Trading Strategies | 3 Comments
Last post on the subject of golden crosses (aka 50/200-day moving average crossovers). Unfamiliar with the golden cross? Read our take on the cross, about its two flavors (SMA and EMA) and crosses in up vs downtrending markets.
In our previous post we looked at trading the golden cross with and without confirmation by the Dow Jones Transportation Index (DJT). In that post we tested a strategy trading the Dow Jones Industrial Average (DJIA), because it was a nice match for the transport index.
But as I wrote in that post, I’m not a fan of trading the DJIA (it’s just too concentrated in too few names), so in this post we’ll rerun the same test trading the S&P 500 index.
[logarithmically-scaled]
The chart above shows the results of two strategies trading the S&P 500 from 1951 (blue) to present. The first (red) is the straight version, going long at today’s close if the 50-day SMA of the S&P 500 crossed above the 200-day today. The second (green) is looking for DJT confirmation – it will only go long if both the first condition is met AND the 50-day SMA of the DJT index is trading above its 200-day.
Geek notes: these results are frictionless (i.e. do not account for transaction costs or slippage), and I’ve included a return on cash when not invested of half the nearest 13-week Treasury bill.
And for the number lovers…
Same conclusion as the previous DJIA test: though performance wasn’t significantly improved, the benefit of requiring DJT confirmation has been a sizeable reduction in exposure (time in market).
And accomplishing (more or less) the same end goal with less exposure to the market is an inherently good thing because it reduces the risk of getting caught looking the wrong way on a massive unpredictable black-swan’ish day (a’la Oct. 1987).
What do these results say about this market?
The 50-day SMA of the S&P 500 closed over its 200-day SMA at Tuesday’s close (06/23), meaning by the traditional definition, the market is now bullish. Side note: the 200-day SMA is still falling, but as we showed here, that hasn’t historically been a negative.
But the 50-day SMA of the Dow Jones Transportation Index is still below its 200-day SMA, meaning, based on this test, this golden cross is not yet so bullish (rather, neutral).
What’s my take?
In short, I don’t have one – I don’t know what the broader trend is (and don’t really care all that much).
Readers know, I’m not a fan of trend-following – I think investors are much better suited using shorter-term more active strategies. This series has really been for the benefit of folks (a lot) less hyperactive than us.
[Edit: click for a summary of all posts in this series on trading the Golden Cross]
Happy Trading,
ms
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Filed under: Trading Strategies | Leave a Comment
A lot of chatter about the stock market’s upcoming golden cross has focused on whether the Dow Jones Transportation Index (DJT) is confirming a bullish trend.
Unfamiliar with the golden cross? Read our take on the cross, about its two flavors (SMA and EMA) and crosses in up vs downtrending markets.
As the theory goes, to qualify as bullish, the DJT (an index of U.S. companies that move stuff around like airlines, railroads, ocean freight, etc) must also confirm the market’s golden cross. I’m not a Dow Theory proponent, but if I remember correctly, this concept originated there.
In this post, we’ll look at how off-the-shelf golden crossovers, versus those confirmed by the DJT, have performed historically.
[logarithmically-scaled]
The chart above shows the results of two strategies trading the Dow Jones Industrial Average (DJIA) from 1931 (blue) to present. The first (red) is the straight version, going long at today’s close if the 50-day SMA crossed above the 200-day today. The second (green) is looking for DJT confirmation – it will only go long if both the first condition is met AND the 50-day SMA of the DJT index is trading above its 200-day.
Geek notes: these results are frictionless (i.e. do not account for transaction costs or slippage), and I’ve included a return on cash when not invested of half the nearest 13-week Treasury bill.
And for the number lovers…
Requiring DJT confirmation, improved performance over the life of the test, but only slightly. The strategy has gone through long periods where it hasn’t really helped or hurt.
What is more impressive to me is that the confirmation strategy maintained performance, while drastically reducing exposure (time invested in the market).
I’ve written about this before: accomplishing the same end goal with less exposure to the market is an inherently good thing because it reduces the risk of getting caught looking the wrong way on a massive unpredictable black-swan’ish day (a’la Oct. 1987 or Sep. 11, 2001).
Do I think DJT confirmation, as I’ve defined it here, is a huge step up in the strategy? No. Do I think it’s a nice little tweak that should at least be in the back of the mind for trend-following types? Sure.
Last comment: I’m not a fan of trading the DJ Industrial Average. I used it here because it was a nice match for the DJT, but my personal opinion is that it’s too driven by too few names (in other words, it’s not sufficiently diluted) to be easily traded.
I personally would much rather trade something like the S&P 500, so in a follow up post, I’ll rerun this same golden crossover test on the S&P 500, but still using the DJT for confirmation. More to follow.
[Edit: click for a summary of all posts in this series on trading the Golden Cross]
Happy Trading,
ms
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Filed under: Stock Market Sectors, Trading Strategies | 3 Comments
