On 8.8.11, SPY made a new 200 day low. As the results will show, a market making new 200 day lows remains volatile and prone to failure for many months going forward.
I’m still struggling with the best way to model an abnormal market that is making history daily with unprecedented action. The idea is to get enough sample sizes to feel confident about the results. The SPY’s recent 200 day low may offer just what we need: decent sample size and objective criteria to help avoid curve fitting.
The Rules:
- Buy SPY at the Close When It Makes a New 200 Day Low (on a closing basis)
- Sell at the Close X Days Later
- No Commissions or Slippage Included
- All SPY History Used
The Results:
There have been 74 occurrences of new 200 day lows. As the graph shows, once a new 200 day low is made, SPY tends to want to revisit that low.
I stretched out the results over 100 trading days as I think it is important to understand the long-term effect of a new 200 day low on the market. Based on these results, a new 200 day low seems to continue to produce a volatile, somewhat range-bound market, for many months following the occurrence.
And indeud, we have been experiencing the volatility first-hand. The blue line shows that after a new 200 day low is made, the market spasms periodically, producing wild up and down swings of 2% or more.
To demonstrate the difference in volatility, I added the results of buying SPY after it makes a new 200 day high. Newton would be proud to see his first law demonstrated so simply. In fact, this illustrates how we should be thinking about a market making new 200 day lows. It is constantly being bombarded by outside forces, whether they be economic, or psychological. In contrast to the market making new 200 day highs, almost every force is stronger than the market itself, and it is constantly buffeted by the changing winds of the economy and investor fear and uncertainty.
The market making new 200 day highs is carried by its own momentum. The momentum allows the market to shrug off bad data and investor fear and uncertainty.
A few posts ago I made the remark that this market was going to eat people alive, if they were not very careful. Looking at the blue line, I’d say the market has a voracious appetite and will be hungry for some time. Discipline is the key. One must face this market without emotion, if he wants to avoid being eaten.
With new lows, it looks like it still will bounce for awhile? No?
Definitely. Expect volatility. Lots of up and down. In fact, the new 200 day low in July of 2010 marked the exact low that year.
Reversion to the mean is still to be expected. Just don’t expect any bounce to last long.
Woody!
Look at SPY’s weekly chart. Stochs are pointing straight down. This will take at least 2-3 good weeks to reverse. MACD is in negative territory. RSI is threatening to go below 20 and most ominous of all, SPY will test the Mendoza line this & next week. To top it all off, September is historically the market worse month! I think next week will paint us a clearer picture and we’ll see if we’ll have a winter of discontent!
Other than that, awesome post as usual!
Thanks. Will have to look at that stuff in the early a.m. Must. Get. Sleep….
This is awesome work!
I have a somewhat-easily implementable request: add error bars for each day.
I’d recommend the standard deviation of that particular #-days-after-200-day-low as your error. For example, if on the 5th day, your standard deviation is 3%, then there would be 1.5% or 3% error bars. I think this would REALLY show the volatility for the 200-day-lows while showing the consistency of the 200-day high.
If you already know how to add them in excel, then pardon me. I took the liberty of making an example of what I would very much appreciate you add. You can download it here: http://dl.dropbox.com/u/54008/ErrorBarExample.xlsx
Thank you very much if you add these!
PS. You can add error bars in the graphs “layout” tab.
it isn’t much good…
the writing was on the wall, I guess…
to counter, Doug Kass offered the other day that the circumstances we have just had are very bullish. I’ll go find the quote…
I started the show by answering a question that Melissa Lee asked of BTIG’s Dan Greenhaus. (Dan ran out of time to answer the question!). Mel wanted to know how the stock market performed during previous short periods of high-volume selling and large price drops. There have been 22 occurrences when these conditions coexisted (large volume and greater-than-13% price drops in under two weeks). The mean return after six months was 10.2% and over 20% a year out. If one ignores the data points during the Great Depression, the gains would have been more pronounced. This is one of the reasons why I suggested that a bottom was put in place this week.
the above paragraph is courtesy of kass.
thats pretty bullish, by and large. average 20%+ gains in one year, more excluding the depression.
and while we have debt problems and a deflationary environment, quite like the depression, we also have these assets: fiat currency, FDIC insurance, an economy not so reliant on farming as to be so harmed by a “dust bowl” experience…
So what you are saying that if one ignores the data points that are not in agreement with his thesis, one could easily surmise that the before mentioned thesis is indeed correct.
My thought is that “the bottom” will be put in on a rather boring day when the market is not headline news. Once all of the bottom pickers have gotten burned and have moved out of the way (again). Doesn’t feel like it yet.
Not that any of this matters. No one ever gets rich off of picking bottoms in the stock market. Just my 0.02.
Woodshedder,
Im thinking of switching online brokers. Can I get a recommendation from my favorite iBC contributor?
Interactive Brokers would be my rec. Lousy charting, but very very good overal.
Wood – damn, man – thanks for the cold shower first thing in the morning!
Couple questions – did you time segregate these instances at all? Or are they as they occur – some isolated spikes, some several in a row?
Odd to think there have been only 74 new 200 day lows (Over 20 years?), actually – seems like a number of those would have occured during the decline from 2007 to the subsequent lows.
Hey Wood,
I saw this article in Barrons and wanted to get your opinion of tradeStation’s new “walk forward” optimizer modeling platform..
http://online.barrons.com/article/SB50001424052702303996204576496251291196460.html
Thanks
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