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
What about after two days, three days, etc. Since the market doesn’t go up (or down) forever, there will be some time after which an up day is followed by a down day. On average after how many days is it best not to bet on a follow through? Or is there a best number of days?
RE to Russ: good questions sir – I’m going to follow up on this post (when I can find a moment to spare) with a “so what?” post discussing some of the questions you’ve posted above. michael
Michael,
What is up with the timing State of the Market updates? I find both SOTM and your blog very interesting. Lately, though, it seems like the updates on SOTM have very sporadic timing, in contrast to the stated target of “(usually) before 8PM.” As just one example, it is almost 4 *AM* right now, and SOTM still hasn’t been updated. Why?
Thanks,
Andre
RE to Andre: been travelling and dealing with family medical issues the last couple of months. I’m the gatekeeper on a lot of what we do (including the SOTM) so the delay is on me. michael
When are you going to post performance results for June?
RE to Ven: In the next couple of days. Just waiting for all the data to come in and a free moment to put it all together. michael