Monday will be the day-after options expiration.

Every month when that magical date rolls around this long ago post gets a ton of traffic. The conclusion of that post in a nutshell was that the day-after options expiration has historically been very week IF the day of options expiration (today) was a down day (which it was).

What I fear those readers fail to notice however is this more recent post where we show that in more recent history the day-after options expiration has been about equally weak regardless of whether the day of options expiration closed up or down, and if anything, this year the original observation has actually worked in reverse (negative Fridays begetting positive Mondays, and vice-versa).

The point?

The day-after expiration is no longer a reliable tool for the trader’s toolbox.

Happy Trading,
ms

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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 switch gears and look at a Nasdaq trend-follower, the 5-10-20 Strategy (all tests up to this point have traded the S&P 500). The specific rules tested are: Go long at today’s close if both the 5 and 10-day exponential moving average (EMA) will close above the 20-day EMA today, and move to cash at the close when both the 5 and 10-day EMA will close below the 20-day EMA.

Note: I’m testing with the Composite because more historical data is available, but as noted here, the strategy has worked equally well trading the Nasdaq 100.

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

As mentioned, all tests are frictionless and account for a return on cash of half the nearest 13-week Treasury bill. Buy and hold is shown in grey and the strategy in red.

YTD Performance

Despite doing a very good job sidestepping the 2007-08 drawdown (see middle view), the strategy has performed poorly this year (see short view). It caught most of the 2009 slide and has missed about half the 2009 rally.

But because the Nasdaq has a shorter-term orientation (i.e. faster and sharper) than a broader index like the S&P 500, I’m still more keen on the 5-10-20 strategy for trading the Nasdaq than any of the other three longer-term trend-followers we’ve discussed this week.

As of 11/19, both the 5 and 10-day EMA of the Composite are above the 20-day EMA, so this strategy is currently long.

Happy Trading,
ms

Geek note: there are two generally accepted methods for calculating an EMA that produce slightly different results. This strategy is using the (2 / (Period + 1)) method. If your charting program uses the ((1 / Period) * 2) method, simply increase my period by one. For example, if I’ve used a 10-day EMA, the alternate EMA would use an 11-day EMA.

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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 I’ll look at two monthly seasonality plays: the turn of the month (equities tend to rise around the beginning and end of the month) and options expiration week (equities tend to outperform during the week leading up to options expiration).

The specific trading rules tested are: go long the S&P 500 index (close-to-close) during both (a) the final four and first three trading days of the month, and (b) the entire week leading up to and including options expiration Friday.

[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. Buy and hold is shown in grey and the strategy in red.

YTD Performance

The seasonality plays did a good job sidestepping the bulk of the 2007-09 drawdown (see middle view), but have done a poor job keeping pace with the subsequent 2009 rally (see short view).

Like the long-term indicators we’ve been testing, I wouldn’t use monthly seasonality alone to justify a trade, but I like the idea of using it to determine the long/short bias for more active short-term indicators. Of the two, I think turn of the month seasonality is the stronger.

Happy Trading,
ms

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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 I’ll combine the three long-term indicators just tested (the Golden Cross, Generals Lead the Troops, and the OEX PCR Strategy) to see how smooth an equity curve these three very disparate strategies would have produced this year. I’ve assumed an even 1/3 split rebalanced daily. Readers will note that these are the three strategies that collectively made up the “long-term” indicators on the free (but now defunct?) State of the Market report.

[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 long-term strategies combined did a very good job in a very difficult year. They sidestepped the 1Q drawdown and caught most of the subsequent rally. I didn’t show the stats, but even eyeballing the chart makes clear that day-to-day volatility was significantly reduced.

Though this combined approach would require fairly frequent changes to the portfolio (and thus, depending on the trading vehicle, transaction costs), I should note that these results could have been reproduced using actively-traded mutual funds (my trading vehicle of choice) net part of an annual expense ratio.

This type of performance (highly correlated to the market but with significantly reduced drawdowns and volatility) is precisely what I’d like to accomplish with our new (but yet to be made public) Enhanced S&P 500 Index program.

Happy Trading,
ms

To stay up to date with what’s happening at the MarketSci Blog, we recommend subscribing to our RSS Feed or Email Feed.

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.

Happy Trading,
ms

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Random thought for today (after a few geeky posts, I’m due an esoteric one)…

I was off the grid for a couple of months doing some non-geeky things. There was the new puppy (now a 6 month old trail-running beast), a jiujitsu tournament and a lot of MMA training (my other obsession in life and someday the topic of a blog post), a bit of travelling back to the US (to maintain my status as the world’s greatest uncle), and soon a Korea adventure with the Other for skiing and kimchi.

And despite all of that time spent away from the quotes and the research and the noise, my trading wasn’t impacted one tiny bit.

Readers know I’m an end-of-day mechanical swing trader. That means I only execute trades at the close. I don’t day trade, and barring financial Armageddon, I don’t monitor positions intraday. I don’t bother with market pundits or message boards, and I don’t agonize over what or when to trade. I follow a very concise mathematical formula, and besides being effective, I require only one thing from my trading: that it not impact my quality of life.

Contrast that with most traders I meet who are so personally involved in the day-to-day business of making a profit: eyes glued to a monitor watching squiggly lines or poring over financial statements or combing message boards. And the sad truth is that the vast, vast majority of them will fail to outperform even simple buy and hold, much less a successful fire-and-forget approach like Faber’s asset-class rotation model, or Luby’s stock of the week, or our own humble trading strategies.

If you are part of the mythical exception who produces supersized returns watching squiggly lines, then good on you – I wouldn’t do what you do, but I understand why you do what you do.

But if you’re not, the point of this random thought is to take the path of least resistance. It pains me to think that anyone misses out on time spent with their nephews or their Others or doing what they love, when there are simpler less intrusive ways to produce outsized returns and meet our financial goals.

Happy Trading,
ms

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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 Generals Lead the Troops strategy (aka large vs small-cap performance). This strategy has been effective using multiple lookback periods, but for this test I’ll use the same parameters I used when I first introduced the strategy: go long the S&P 500 at today’s close if the S&P 500 has outperformed the Russell 2000 over the previous year and to cash if it has underperformed.

[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

Readers know that, generally speaking, I’m not a fan of using trend-following strategies for anything other than setting the long/short bias of more active short-term strategies.

But as far as trend-followers go I like this one as a companion to something like the Golden Cross because (by its nature) it often takes positions that might not match where the trend appears to be today.

The strategy caught a good bit of the drawdown in 2007-08 before moving to cash for most of 2009. Unfortunately, like we saw with the Golden Cross in the previous test, it missed most of the 2009 recovery, but because of a nice call on the market bottom this year it has still solidly outperformed the broader market.

At this moment the S&P 500 has underperformed the Russell 2000 over the previous year (+29% vs +34%), so this strategy is currently in cash.

Happy Trading,
ms

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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 Golden Cross (aka 50/200-day moving average crossovers) trading the S&P 500 index. We’ve talked about all sorts of variations on the Golden Cross, but here I’m testing the simplest: go long at today’s close when the 50-day SMA closes above the 200-day SMA today and to cash when it closes below.

[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 Golden Cross did an excellent job sidestepping the downturn of 2008-09 but also sat on the sidelines for about half of the 2009 rally. All in all, the Golden Cross did exactly what it’s tended to do historically: reduce drawdowns significantly but add very little to actual returns.

The 50-day SMA currently stands about 14% above the 200-day, meaning that this simple strategy is currently long the market and, barring catastrophe, should be for some time.

Happy Trading,
ms

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In the next few posts I’ll be reviewing the performance of some of the simple indicators we’ve covered on this blog, with a particular focus on YTD performance.

This has been an interesting trading year with the precipitous 1Q decline and never-look-back 2/3Q recovery, and I’d like to see how all of these simple indicators fared.

The strategies tested will be: the golden crossover (50/200-day MA crossovers), generals lead the troops (large vs small cap performance), the OEX put/call ratio strategy, the two proprietary intermediate-term strategies from the (defunct?) State of the Market report, daily follow-through, unbounded DV(2), RSI(2), and turn of the month and options expiration week seasonality.

All tests will be frictionless (i.e. will not account for transaction costs or slippage) trading the S&P 500 index at the close, and will account for a return on cash of half the nearest 13-week Treasury bill. I’ll be showing each test in three windows: long (1970 to date, data permitting), medium (2000 to date), and short (YTD).

Yes, I know this post is a bit anti-climatic, but I needed an introduction I could link to so I didn’t have to keep repeating the point of the series. Let the geekery begin…

Happy Trading,
ms

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Been off the grid for a spell – some random thoughts swimming in me noggin’ …

Front and center on my radar now is the future of short-term mean-reversion.

Note that when I say short-term I’m speaking from the perspective of a swing-trader who holds positions from one to a few days (think for example RSI(2)). Short-term MR is so important to what folks like me are doing right now because over the last decade or so, it’s been the most effective directional play.

A quick illustration for the uninitiated:

[logarithmically-scaled]

The graph above shows the result of going long at the close following a close down on the S&P 500 index and short following a close up (red), versus buy and hold (grey), from 2004 to the present, frictionless. This recent tendency for the markets to retrace very recent gains is exactly why short-term indicators like RSI(2) have been so effective.

But note how short-term MR has broken down since July (right end of graph).

The graph above doesn’t really tell the whole tale because it fails to capture return relative to volatility, win % versus win/loss ratio, etc. So the next four graphs are taken from our monthly State of Short-term Mean-Reversion report, updated through 11/16 (read more about how this data is calculated here and here, click to zoom).

*** CLICK TO ZOOM ***

This breakdown in short-term MR has definitely impacted our own results. Our combined performance has been more or less flat in the second half of this year. The equity curve below shows our combined real-time monthly performance vs the S&P 500, assuming an equal investment in each family’s flagship program: MarketSci ProFunds (through 08/2009), RH S&P 500, YK (A and B), and Scotty.

And I continue to see poor to flat results from most of our peers in the managed account community. The only exception has been breakout/trend-following types (although they’ve been getting butchered most of the decade so I guess their day in the sun is due).

The Future of Short-Term Mean-Reversion

I’m still working off the thesis that this breakdown in short-term MR is a byproduct of this very, very bullish leg up in the markets and NOT an indication of things to come. And I still expect short-term MR to be the play du jour again once this market returns to some normalcy.

That could of course all be painfully wrong, so I think it’s important that we continue to keep our fingers on this pulse.

Last note: I’ve been writing a lot about what’s to come in short-term mean-reversion because it’s in distress, but there are a whole host of other concepts we talk about (trading in other timeframes for example) that have doing just fine. The point of that is a reminder (to myself more than anyone) not to be a one-trick pony; YK is screaming this month/year exactly because we’ve done a pretty good job at constantly switching between playing momentum and mean-reversion.

Happy Trading,
ms

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