Joined Nov 11, 2007
1,458 Blog Posts

Its Been 23 Days Since the S&P 500 Made a New High. Bullish or Bearish?

On April 2nd, SPY made a new 50 day high. How long can the index trade without making another new high before our expectations turn bearish?

It makes intuitive sense that the longer an index trades without making a new high the more bearish traders become. In fact, this might be one time when intuition and historical results agree.

The Rules:

Buy SPY at the close if

  • It has been > X days since SPY made a new 50 day high (NH50)

Sell SPY at the close Y days later.

No commissions or slippage included. All SPY history used.

The Results:

The above results show that traders should begin to expect consolidation or bearish action when it has been more than 25 days since SPY made a new 50 day high.

What makes these results even more bearish, in my opinion, is that SPY was within a percent or so of making a new high, and then failed to do so. The resulting chart (see below) is beginning to suggest that we might be seeing a correction rather than a pullback. The longer SPY trades without making a new high, the more likely it is that trading will become more volatile and bearish.

The Bottom Line:

If we could look back on recent market action from the future, I do not believe we would be calling it a pullback. As the market continues to trade sideways (or down), I believe history will record this as a correction. Be prepared to move to cash or introduce whatever protective measures fit your investment profile.

Eventually, an inflection point will be met where we can determine that SPY has traded for too long without making a new 50 day high. Then it will be time to become very bullish. A future study will seek to determine where or when this inflection point might occur.

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S&P 500 Closed Beneath the 50 Day Average. Should You Be Worried?

The 50 day moving average is an important demarcation, but a few closes beneath it are nothing to be concerned about.

The Rules:

Buy SPY at the close if

  • it has traded < 10 day beneath the 50 day simple moving average

Sell the trade at the close X days later.

No commissions or slippage included. All SPY history used.

The Results:

As the chart shows, there is nothing much to be worried about if SPY trades beneath the 50 day for a few days or even a couple of weeks.

The buy-n-hold results are calculated by chopping all SPY history into 50 day segments and then averaging those segments.



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Top-Ranked Fidelity Sector Funds

The Fidelity Sector Fund Rotational System continues to top-rank some surprising sectors. The U.S. consumer looks to have risen from the dead. Whether or not this trend will hold is anyone’s guess. Of course if you trade momentum, you will bet it will continue.

Version 1 Ranking:

  1. FSRPX (Retailing)
  2. FDCPX (Computers)
  3. FSCPX (Consumer Discretionary)
  4. FSHOX (Construction and Housing)
  5. FSPTX (Technology)

Version 2 Ranking: (Version 2 is not being traded live, yet)

  1. FSHOX (Construction and Housing)
  2. FSVLX (Consumer Finance)
  3. FSRBX (Banking)
  4. FDFAX (Consumer Staples)
  5. FSCPX (Consumer Discretionary)

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Why I Got Rid of My Real Time Futures Feed

For years the laptop would sit beside my chair, always on, always with the futures feed charted in 5 minute candlesticks. During the Armageddon trade of 2008 the laptop with the futures feed running would sit on my nightstand, beside my alarm clock. It felt good to be plugged in and up-to-date to the very last tick of the markets. I was watching the implosion of the financial capital of the world, in real time. I would tell my grand children about it.

As I look back on those years of frightful sleep and stomach-churning days and evenings, Macbeth’s soliloquy speaks to me:

“Tomorrow and tomorrow and tomorrow,
Creeps in this petty pace from day to day
To the last syllable of recorded time,
And all our yesterdays have lighted fools
The way to dusty death. Out, out, brief candle!
Life’s but a walking shadow, a poor player
That struts and frets his hour upon the stage
And then is heard no more: it is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.”

What good is it to have a futures feed running all night if you don’t trade futures? It is like seeing a car wreck in progress. Except you can’t do anything to stop the wreck or help anyone until after the crash. What’s the point of watching the progress of it, living in it, if you are not going to use the information while it is happening? What’s the point of the day-to-day and night-to-night hand-wringing?

All good questions, for sure.

The truth is that I got rid of my real-time futures feed because I got rid of Tradestation. Tradestation, with its .01/share commissions and $100 bucks/month fee for trading less than 5K shares and its counter-intuitive “Easy Language” code was simply too expensive. I also had an account with Interactive Brokers, and at .005/share commissions and no platform fees, it just made sense (cents) to close down the Tradestation account and move everything over to IB.

While Interactive Brokers does offer a futures feed, their charting does not compare to Tradestation’s, and it was a hassle to pull up the feed on IB. Without really thinking about it–more or less just being lazy– I went without, for a few days. And then a week passed without the futures. I had missed it not at all. Two months later I realized that weaning myself from the futures feed has made a positive impact on my life and my trading.

Not only am I better able to tune out and off from the markets and focus on other important areas of my life such as my family, exercise, and sleep–I am able to execute mechanical system trades with much greater ease and much less nagging doubt.

Since I do not daytrade and typically trade the open or close via orders placed the prior evening, having a futures feed was significantly affecting my psychology and ability to mechanically place trades. Waking up at 3 a.m. to see what the futures were doing was allowing me to fast-forward in my own mind to the trades scheduled to be executed the next day. Many times I would second-guess these trades. My self-talk would often revolve around delaying the trade or setting a limit order rather than using a market-on-open or market-on-close. While the majority of time I did not override the systems I trade, sometimes I did. How much time did I waste trying to out-smart my own system? How much mental capital did I spend attempting to assimilate information that was unnecessary for my success? How much real capital was lost from deviating from a strict trade plan?

Traders these days are easily overwhelmed by the hundreds of indicators, platforms, experts, pundits, amateurs, tweets, bloggers, etc. Information overload is a very real threat and can be a detriment to trading success. At some point, the various bells and whistles just end up making a lot of noise. I highly recommend focusing on the factors most necessary for trading success and dumping everything else. Without a doubt, it has improved my quality of life and made me a better trader.


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And the Top-Ranked Fidelity Sector Fund Is…

It is that time of the month. Time to sit and rotate. Or was it rotate and sit? Anyone remember that old “cut down” from the late 70s early 80s?

The Fidelity Sector Fund Rotational System Version 1 is holding one fund that is up for rotation tomorrow. The fund is FDCPX (Computers) and was purchased on 4.2.12, meaning the fund has been held for the 30 days as required by Fidelity.

It turns out that after running the rankings tonight, FDCPX is the 3rd highest ranked Fidelity Sector Fund which means it will not be sold tomorrow after all. Now that the 30 day minimum hold has been met, every night I will re-run the rankings, and if FDCPX drops out of the top three funds, it will be replaced the next day.

Which brings us to the all-important moment…What is the top-ranked Fidelity Sector fund?

  1. FSRPX – Retailing
  2. FSCPX – Consumer Discretionary
  3. FDCPX – Computers
  4. FSHOX – Construction and Housing
  5. FDLSX – Leisure

The best performing funds look like a contrarian’s dream.

The system is currently holding FSHOX, FDLSX, and FDCPX.

Year-to-date Version 1 of the system has net profits of 9.86% vs SPY’s net profit of 10.38%.

The chart below is of the top-ranked Fidelity Sector fund. Click to enlarge…


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S&P 500 Still Working Through Process of Normal Pullback

A couple of weeks ago I wrote that modeling of similar setups showed that SPY was likely working through a normal pullback and not making a significant top.

This post continues with the same line of inquiry, the goal of which is to model recent SPY behavior without making the model so specific that there are not enough samples to backtest.

SPY made a new 50 day high 18 days ago and the 18 day rate-of-change is a tad more than -1%.

All I have done is told the backtester to find other similar instances.

The Rules:

Buy SPY at the close if

  • It made a new 50 day high >15 days ago and <20 days ago
  • The 18 day ROC is <-1% and >-2%

No commissions or slippage were included. All SPY history was used.

The Results:

The results look very similar to the previous study. After a period of consolidation, the rally continues. There were 29 occurrences of this setup, and 22 of them were held for the full 50 days.

As I’ve said before, there is nothing magic here. Making new 50 day highs is a big deal, and the momentum tends to persist. Perhaps the most important takeaway is that when SPY is making new 50 day highs, it seldom goes more than a few days or a week before making another new high. If SPY goes any longer without making a new high, it is likely pulling back.

I calculated the average SPY buy-n-hold return by chopping all SPY history into 50 day segments and then averaging the segments.

The most recent example of this setup occurred when a pullback began on 11.8.2010. Another example was the pullback that began on 8.10.2010.

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