iBankCoin
Home / Woodshedder (page 11)

Woodshedder

Let’s Look at Seasonality for April

Still a week to go, but I was getting a little nervous and wanted to take a look anyway.

We know from this post from CXO what to look for at the beginning of April, but what about the rest of the month?

April Seasonality

Click on the chart to enlarge. Calculations start at the close of the last trading day of March and end on the close of the last trading day of April.

$SPX data goes back to 1928. $SPY data goes back to 1993. The two sets of data demonstrate how April seasonality has changed recently, if recently is over the last 20 years.

April Statistics for $SPY ($SPX)

  • Average Monthly Profit/Loss = 2.00% (1.12%)
  • Winning Months= 70.00% (60.00%)
  • Worst April = 2002 loss of -5.9% (1932 loss of -14.8%)
  • Best April = 2001 gain of +9.4% (1933 gain +31.0%)

Profit Distributions:

profdist

Equity Curve:

1_ Portfolio Equity

April returns since 2007 have been excellent. Last year was the first losing April since 2005. My belief in mean reversion has me betting that April 2013 will be a loser.

Comments »

Fidelity Sector Funds Ranking Gets Defensive

For the first time this year, a defensive fund has moved into the top 3 ranked Fidelity Sector Funds.

Current top 5 ranked funds:

  1. FSAIX (Air Transportation) made a new high today…
  2. FSRFX (Transportation) just shy of a new high…
  3. FSUTX (Utilities) made a new high today…
  4. FSLBX (Brokerage and Investment Management)
  5. FSPCX (Insurance) just shy of a new high…

The Utilities fund momentum ranking is low but so is its volatility…thus it is replacing some of the higher momentum funds that have become more volatile.

Comments »

Large $VIX Surge, $SPY Hardly Moves. Bullish or Bearish?

@JBoorman tweeted something that sparked my interest:

While the stat (largest 2-day $VIX spike on less than 1% 2-Day $SPY drop) seemed to be correct, I wanted to determine if this was truly a “big tell.”

Let’s test it and find out.

(To be clear, @RyanDetrick was the stat hunter that found the stat…)

The Rules:

  • Buy $SPY at the close when $VIX 2-day change is greater than 15% and $SPY loses less than 1.5% over the same 2 days.
  • Sell X days later.
  • No commissions or slippage included.
  • All $SPY history used.

Note that I relaxed the setup rules to try and get a good sample size. I also wasn’t sure if the original stat was using a 1 or 2 day $SPY drop. I opted for 2 since it was symmetrical with the large 2-day $VIX spike.

The Results:

VIX Spike SPY Doesnt

The graph above shows the averaged performance of all trades after this setup.

Over an intermediate term, the market gets back to bullish business as usual. Short-term, however, the market tends to pullback after this setup.

There was 41 occurrences of this setup. There were 35 trades made with 29 held for the full 50 days.

I’m not sure if it is a big tell, but it is interesting that the increase in fear does tend to weigh on the markets over the next week or so.

Comments »

Sustainable, Tradeable Bounce Still Developing

I have a couple of favorite breadth indicators which I use to determine when a bounce is imminent and sustainable. Neither indicator has reached the bounce threshold, but they are near.

3_19 breadth

The main chart is $SPY with the major moving averages.

The middle pane, green line, is a percent ranked measure of the daily number of declining stocks. When this indicator gets above 80, I start looking for an immediate, typically next-day bounce. Ideally it is above 85 and nearing 90. These bounces may not last long unless the next indicator is also signalling a bounce.

The bottom pane, red line, is the number of stocks trading above their 5 day moving averages. It closed at 1,170. It needs to fall further to around 700 before I begin looking for a sustainable bounce. By sustainable I mean a bounce which should last for more than a day.

For now I do not see much of a short-term edge in terms of direction. Another moderately strong down day will likely trigger both of these indicators to signal a bounce.

Comments »

Mean Reversion is Not Dead: MR System Returned 26.6% in 2012

Back in the halcyon days before the Armageddon trade of 2008, mean reversion was all the rage. Although mean reversion continued to work extremely well through the crash of 2008, most traders did not have the intestinal fortitude to buy the dips and sell the rips when it appeared that the financial world may collapse at any point.

It was during this period that I was working with another blogger/trader on several systems, one of which was a short-term mean reversion system. It is that system that is the subject of this blog post.

After the system was finished, we decided to register the trades officially at a tracking service and trade it live. It was our belief that the system was worth offering for subscription or had additional value beyond the money we could make trading it. Both of us had day jobs, and we fairly quickly realized that trading the close was difficult for both of us, for two reasons. The first reason is that for those of us who trade and work, Murphy’s Law ensures that whenever there is a big trade that needs to be made, work will interfere. The second reason is that systems that rely on binary buy or sell signals sometimes flip-flop or hover near the threshold. If it is 3:39 and the trade has to be entered by 3:40 for a market-on-close order and it is flip-flopping between buy, hold, and sell, making the correct trade can be a challenge. Couple this second reason with the first reason and we eventually decided to stop tracking the system and trading it live.

If I remember correctly (it has been a little over 4 years), we also weren’t sure if the system would continue working.

We can now look back and see that the system did indeed endure through a rough patch in 2009 and 2010. I believe the character of the market changed after the crash of 2008, and 2009 and 2010 saw a return to a market that wanted to trend. The S&P 500 returned better than 20% in 2009 and over 10% in 2010. The mean reversion system managed to squeeze out 10% in 2009 and was flat in 2010.

Based on this performance, and the flailing performance of other similar systems, it was easy to write mean reversion off as being dead.

My friend and partner went our separate ways, and have not worked together since.

I have not forgotten about this system, and continue to watch it. Consider that it now has better than 4 years of out-of-sample trades. So how has it been performing? I guess the title of this post gives it away…

Let’s look at the equity curve for the long/short version. The system uses leverage for any trade that is with the trend. For example, if a dip is being bought and the trend is up, then 2x leverage is used.

MR System Long_Short Leverage

That equity curve shows a system with an annualized return of 18.35%, including .005/share for commissions. In 2011 it returned 24.3%.

The equity curve clearly shows where mean reversion peaked in 2008 and where it took a 2 year cooling-off period in 2009 and 2010.

Now let’s look at the long-only version, still using leverage.

MR System Long Leverage

This equity curve shows a system with an annualized return of 7.93%, including .005/share for commissions. It has beat the S&P 500 in both 2011 and 2012 with about half the maximum drawdown of the S&P. Time in the market (exposure) is only 11%.

I will likely get deeper into the system stats in a later post.

For now, it seems ridiculous to me that I’m not trading a version of this system. This speaks to the difficulty in system trading as the rules must be adhered to even during long periods of under-performance. There are some important questions I intend to answer in the future. Once I have these answers, I may begin trading it again.

Here are some of the questions:

  • Is there a way to accurately place orders for this system while at work?
  • Can exposure be increased without significantly increasing drawdowns?
  • Can tracking system health be used to in conjunction with the equity curve to improve results?

 

Comments »