Simple Indicator YTD Review: OEX Put/Call Ratio Strategy

19Nov09

This is a multi-part series looking at how some of the simple indicators we’ve talked about in the past fared through this very interesting trading year.

In this post we look at the OEX PCR Strategy applied to the S&P 500 index. This is a longer-term strategy that takes contrarian positions against the OEX put/call ratio (read more here and here). It first requires calculating the ratio of the S&P 500 vs the OEX PCR. The trading rules then are: go long the S&P 500 at today’s close when the 21-day (1-month) EMA of that ratio crosses below the 42-day EMA today, and move to cash when it crosses above.


[growth of $10,000, logarithmically-scaled]

As previously mentioned, all tests are frictionless and account for a return on cash of half the nearest 13-week Treasury bill.

YTD Performance

The strategy did more or less the opposite of the last two tested (here and here). It did a nice job of playing the 2Q bounce, but moved to cash as the market became overheated in the second half of the year.

Like the Generals Lead the Troops strategy, I like this one because it’s been successful picking entries/exits that are so much different than a traditional trend-following strategy, so it provides a bit of strategy diversification for traders of the longer-term variety.

In the following post, I’ll combine all three of these long-term strategies to see how smooth of an equity curve three very disparate strategies were able to produce.

[Edit: click to read the rest of the YTD Review]

Happy Trading,
ms

 

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2 Responses to “Simple Indicator YTD Review: OEX Put/Call Ratio Strategy”

  1. 1 Kevin

    Michael – you state the following in one of your prior posts…

    Geek Note: There are two generally accepted ways to calculate an EMA that produce slightly different results. Here I have used the ((1/Period)*2) method. If your software uses the (2 / (Period + 1)) method, simply reduce my period by one. For example, if I’ve used a 21-day EMA, the alternate EMA would be a 20-day EMA.

    I am using the latter method. Hence would I subtract one period from both the 21 and 42 day ema’s and use 20 and 41?

    Thanks,

    Kevin


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