Fecal Cliff – Bounce or Die!

Two measures of breadth that I’ve been following for years are signaling that a bounce is likely. There are probably other measures that are confirming that market breadth is oversold, but I’m a believer in following and trusting in what you know and understand, and these indicators fit that description.

The two indicators are the number of stocks above their 5 day moving averages and a percent-rank of the number of declining stocks.

The Rules:

• Buy $SPY at the close when the number of stocks above their 5 day moving averages is < 650 and the percent-rank of declining stocks is > 89.
• Sell $SPY at the close X days later.
• No commissions or slippage included.
• All available $SPY history used.

The Results:

So yeah, oversold breadth tends to lead to a bounce. Duh.

Some Additional Stats:

Next Day Winning Percentage: 53.75%
5 Day Winning Percentage: 59.71%
Median Trade After 50 Days: 2.77%
Average Trade After 50 Day: 2.00%
Number of Setups: 160
Number of Trades Held 50 Days: 60

Belows is a chart showing the indicators…Click to enlarge…

I have included trading arrows to demonstrate when both indicators have triggered in tandem. The red down arrows show the sells 50 bars after the buy. There were other times the indicator triggered, but those are not reflected in the chart because it was already in a long trade from a previous trigger. In other words, the system can only be in one trade at a time.

Ignoring technical measures, I’m thinking that the recent selling is likely due to seasonal reasons plus the expectation of the increase in capital gains taxes. If this is true, the selling may continue despite market breadth being oversold.

I’m guessing that good news on the fecal cliff will yield a bounce that may be substantial initially, but may sell-off once the details are better understood.

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