Thursday’s post examined what happened after SPY was down two days in a row, losing more than 1.5% each day. History showed that the third day saw SPY bounce more than 70% of the time. Instead of bouncing, SPY closed down on the third day. What can we expect going forward?
On Friday, SPY closed down slightly, losing roughly 0.1%. Let’s look at what happen when the bounce fails to materialize on the third day.
The Rules:
Buy SPY at the close if:
- 2 days ago SPY closed down more than 1.49%
- 1 day ago SPY closed down more than 1.49%
- Today, SPY closed lower than yesterday’s close.
- Sell X days at the close.
- No commissions or slippage included.
- All SPY History used.
The Results:
Despite a failed bounce on the third day, slightly more than 50% of trades bounced on the 4th day.
Be careful with the average returns as presented. One trade gained more than 14.5%, and it has skewed the returns. View the graph below to see the trade.
Trade By Trade Results:
Date/time shows the date the setup was completed and the buy was made.
Each day listed does not show a cumulative return starting from purchase. Instead it shows what happened on that particular day.
Again, we must be careful looking at the average returns in the first chart because we see in the graph above a 14.52% return, which is an outlier. If we remove that particular trade, the next day return drops to an average of 0.36%.
Without the outlier trade, results are not impressive. With the percentage of winning trades barely above 50%, I’m not putting much faith in a large bounce on Monday. Still, the conditions are such that we could see a large bounce.
Perhaps the major highlight of the trade by trade results is the volatility. Look how many days have returns of greater than 1%!
It looks as if the volatility beatings will continue until moral improves.
Holiday week, slightly up bias. I wonder if we’ve ever seen this during holiday trading before and if those results would be much different.
jeff, all the instances of this happening since 1993 on SPY are above. A quick glance shows none during a seasonaly positive holiday period.
Not enough data points to be conclusive.
Yep. That in itself is a data point. The market continues to behave in ways that we do not often see.
One more data set, that in conjunction with several of the previous studies, indicates we should expect continued volatility. I also reluctantly conclude we are likely still in a bear market environment, which would be negated if we don’t see any additional -1.5%, -1.5%, -X% closes. I know that’s not the most helpful statement, but maybe in 6 months it will be a strongly bullish data point. Note that we did not see this sequence in early 2003, even though the market hit significant lows. Was its absence a strong signal to go long in March/April?
Very interesting and useful study.
Lambo here. Woody, are you ready to apologize to Karl Denninger?
Lol…I schooled Denninger. And then to make matters worse, others piled on and sent him back to school to repeat.
What would I apologize for? Being right?
You probably are down since you “schooled” Denninger last year, did you?
Now the world is really over. OVER! what do you have to say about that?
Lambo, not only was Denninger wrong, but his arch nemesis, Dennis Kneale was right! Boy that hurt, I’m sure.
To be clear, Denninger argued some silly stuff that a Golden Cross didn’t matter unless the 200 day moving average was rising. Said it was invalid. My research, and the research of others, proved that he had it exactly wrong. It actually performed better with a falling 200 day average.
You may recall this was in summer of 2009. After the cross, SPY rallied from ~85 to ~117. You can do the percentage gain on that if you want. Even if you sold on the death cross in 2010, you sold near ~107.
Ouch. And to think Denninger went on CNBC attacking Kneale, and had it exactly wrong.