Here we are again. Does $SPY bounce and continue to consolidate around the 50 day average or does it slice through the 50 day and begin a real correction?
Two of my breadth indicators are signaling that we will bounce, and soon. Let’s take a look.
We are focused on the red and green indicators in the bottom panes. The green line is the decliners indicator which ranks the current number of decliners against previous numbers. Anything above 80 is usually good for an immediate bounce. It closed at 90+.
The red line is the number of stocks above their 5 day moving averages. I like for this number to get beneath 700 in order to indicate the possibility of a bounce sustaining itself for several days. It closed at 891.
I’m looking for a quick bounce. I still think it will not be sustained for long and $SPY will end up right back where it started.
Wood, this has been an intriguing series of posts, and really useful. My instinct agrees with you about a quick bounce.
Getting back to a previous comment about buying the waterfall, I duplicated your work in Excel to see if there was something that could be done to reduce losses when the market was in a sustained downdraft. Since high volatility usually occurs with a falling market, I had hoped that using the volatility of SPY daily returns (STDEV function in Excel with a 10 day look-back period) might be able to vary either the 10 day hold or the 80% threshold so we are less exposed to big drops. Good idea, but where I ended up was completely different – back to your lines about the market character changing in 2002. I plotted the 10-day SPY volatility and the >80% decliners buy signals for 1998 to 2012, dividing that time into two periods – before and after the major bottom of 10/10/2002. Before: average volatility of 0.013, and 0.036 average buys per day. After: average volatility of 0.011, and 0.057 average buys per day. Yes, there was a big change in late 2002. But it was very odd – we went from a high volatility period with few stocks ever getting oversold (hitting the 80% decliner threshold), to a period with low volatility, where stocks frequently became oversold, and that includes the huge volatility of 2008 and 2011. Go figure. Retail investors not playing after the tech bubble? HFT? I don’t know, but it explains why this strategy didn’t work very well before 2002. Dips were bought before stocks ever declined very much, and advances were sold before getting overbought, even as the overall market experienced high volatility. And it means my ideas will be very hard to implement without overfitting the data. But I’m still trying.
In any case, thanks for sharing all your work; great posts about breadth systems.
Thanks for this comment. I’m exhausted after watching my Cards get killed and trying to simultaneously process the debate. I’ll get back to this tomorrow. Really appreciate your thoughts.
Thanks, Wood.
really great work..
Thanks!