Trading the Odds

A statistical approach to profit in the US equity markets, trading the markets like professional card counters are playing Blackjack or expert poker players are playing Poker.

VIX and VIX Futures Seasonalities

WE031672-klein

This is a follow-up to my post Memorial Day, the VIX and Other (Un-)Favorable Seasonalities.

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A few weeks ago I posted about the weekday seasonality of the VIX (see Weekday Seasonality of the VIX), and as Adam Warner on the Daily Options Report already pointed out: (cit.) “The *cash* VIX loses some steam ahead of holiday’s/weekends as traders lower bids to account for their weekend/holiday decay.”

Due to one of those findings posted in Memorial Day, the VIX and Other (Un-)Favorable Seasonalities, I thought it would be interesting to check if the same principle (quite probable) -and to what extend- (which was the more interesting question) applies to long weekends with an exchange holiday as well, and (the most appealing question) is there a chance (if any) to capitalize on those ‘VIX Seasonalities’ with a (partly extraordinary) significant bullish bias (concerning the VIX), e.g. by utilizing the CBOE VIX front month future.

I checked for those occurrences since 01/02/1990 where the following setups were triggered, assumed one would have bought the VIX (CBOE S&P 500 Volatility Index) on close of the session immediately preceding the respective exchange holiday for a holding period of 1 day. Therefore concerning Memorial Day one -hypothetically and for statistical purposes only- would have bought the VIX on close of Friday immediately preceding Memorial Day (in this event Friday, May 22, 2009), and closed the trade on close of Tuesday after Memorial Day .

The US exchange holidays are celebrated …

  • New Year’s Day - January 1
  • Martin Luther King, Jr. Day – observed on the third Monday of January
  • Presidents Day - observed on the third Monday of February
  • Memorial Day - observed on the last Monday of May
  • Independence Day - July 4
  • Labor Day - observed on the first Monday in September
  • Thanksgiving Day - observed on the fourth Thursday of November
  • Christmas Day - December 25

____Left Out____

Good Friday

____No Exchange Holidays____

Columbus Day - observed on the second Monday in October

Veterans Day - November 11

_______________________

At first Table I below shows the VIX performance (since 01/02/1990) concerning setups S1 to S5 -side by side- on the next sessions assumed one would have bought the VIX on close of the session immediately preceding the respective exchange holiday. Setups S1 to S5 are defined as

Table I

  • Setup S1: New Year’s Day - January 1
  • Setup S2: Martin Luther King, Jr. Day – observed on the third Monday of January
  • Setup S3: Presidents Day - observed on the third Monday of February
  • Setup S4: Memorial Day - observed on the last Monday of May
  • Setup S5: Independence Day - July 4

20090524-VIX-2

Table II below shows the then current VIX front month future‘s performance (since 04/15/2004) concerning setups S1 to S5 -side by side- on the next sessions assumed one would have bought the then current VIX front month future on close of the session immediately preceding the respective exchange holiday.

20090524-VX-2

Table III below shows the VIX performance (since 01/02/1990) concerning setups S1 to S3 -side by side- on the next sessions assumed one would have bought the VIX on close of the session immediately preceding the respective exchange holiday. Setups S1 to S3 are defined as

  • Setup S1: Labor Day - observed on the first Monday in September
  • Setup S2: Thanksgiving Day - observed on the fourth Thursday of November
  • Setup S3: Christmas Day - December 25
  • Setup S4, S5 VIX

20090524-VIX-3

Table IV below shows the then current VIX front month future‘s performance (since 04/15/2004) concerning setups S1 to S3 -side by side- on the next sessions assumed one would have bought the then current VIX front month future on close of the session immediately preceding the respective exchange holiday.

20090524-VX-3

Bottom line: Although the VIX itself shows a consistant bullish pattern on the session after the long weekend -only the magnitude of change on the upside varies-, VIX front month futures show mixed results -from significantly ‘bearish’ (dropping the session following the respective exchange holiday with a significant below-average profit factor, regularly the exchange holidays in the second half of the year) to significantly ‘bullish’ (regularly the exchange holidays in the first half of the year), but results might be purely random due to the very low sample size (5 occurrences only), and heavily depending on the then current (positive or negative) premium of VIX front month futures above or below the *cash* VIX (some kind of a short-term ‘mean-reversion’ tendency). So VIX front month futures do not show a statistical relevant tradable edge in order to capitalize on the VIX’ bullish bias over long weekends.

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A second appealing question is if -and to what extend- VIX front month futures would show a bullish and/or bearish weekday seasonality like the VIX does on Fridays and Mondays, and if there is a chance to capitalize on any such pecularities (if any).

Just as a reminder Table V below shows the VIX performance (since 01/02/1990) concerning setups S1 to S5 -side by side- on the next sessions assumed one would have ‘bought’ the VIX on close of the session immediately preceding the respective weekday. Setups S1 to S5 are defined as

  • Setup S1: Monday
  • Setup S2: Tuesday
  • Setup S3: Wednesday
  • Setup S4: Thursday
  • Setup S5: Friday

20090524-VIX-1

The win/loss ratio on Fridays is tilt in favor of lower (VIX) closes, and significantly tilt in favor of higher closes and significantly above-average magnitude of change on the upside (‘profit factor’) on Mondays.

Table VI below now shows the then current VIX front month future‘s performance (since 04/15/2004) concerning setups S1 to S5 -side by side- on the next sessions assumed one would have bought the then current VIX front month future on close of the session immediately preceding the respective weekday.

20090524-VX-1

Concerning the win/loss ratio none of the weekdays shows any statistically relevant above or below average probability for a higher or lower close, and the notably above-average magnitude of change (‘profit factor’) on Wednesdays and below-average magnitude of change on Tuesdays is mainly impaired by the (slightly) above-average win/loss ratio on Wednesdays, (slightly) below-average win/loss ratio on Tuesdays and the volatility of the VIX front month future itself (the average magnitude of change in VIX front month futures is significantly above the average magnitude of change of the SPX, so a minor deviation in win/loss ratios has an immediate and major impact on the respective profit factor).

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Bottom line:

  1. Although the VIX shows a consistant bullish pattern on the session after the long weekend -only the magnitude of change on the upside varies-, and if -and to what extend- this could possibly provide a tradable edge concerning VIX front month futures is more depending on the then current premium of VIX front month futures above or below the *cash* VIX (with some kind of a short-term ‘mean-reversion’ tendency of premiums) and the respective magnitude of change concerning the VIX on the session immediately following an exchange holiday than the fact itself that the VIX regularly closes higher the session after an exchange holiday.

Successful trading,

Frank

Disclaimer: (Net) Long VIX futures at time of writing.

P.s.: WordPress recently implemented a Twitter widget, so I’ll regularly make some intraday updates as well using Twitter. If you’re interested in, please have a look at the blog during the trading session as well or subscribe directly to Twitter (recommended).

Filed under: Studies/Survey, , , , , , ,

Memorial Day, the VIX and Other (Un-)Favorable Seasonalities

WE031672-klein

Monday next week will be Memorial Day, and additionally we’re entering into the favorable (with a bullish bias) end-of-month period for stocks -at least as an adage says-.  As always I decided to take the quantitative approach concerning this (potential) end-of-month phenomena in oder to check if there is any historical and statistical evidence which supports the thesis, and to check it the sessions following Memorial Day and (almost, except Good Friday) all other exchange holidays as well show any potential peculiarities possibly providing a tradable edge.

I checked for those occurrences since 01/02/1990 where the following setups were triggered, assumed one would have bought the ES (E-mini S&P 500 Futures) on close of the session immediately preceding the respective exchange holiday for a holding period of 5 days (1 week). Therefore concerning Memorial Day one would have bought the ES on close of Friday immediately preceding Memorial Day (in this event Friday, May 22, 2009), and closed the trade on close of Monday one week after Memorial Day .

The US exchange holidays are celebrated …

  • New Year’s Day - January 1
  • Martin Luther King, Jr. Day – observed on the third Monday of January
  • Presidents Day - observed on the third Monday of February
  • Memorial Day - observed on the last Monday of May
  • Independence Day - July 4
  • Labor Day - observed on the first Monday in September
  • Thanksgiving Day - observed on the fourth Thursday of November
  • Christmas Day - December 25

____Left Out____

Good Friday

____No Exchange Holidays____

Columbus Day - observed on the second Monday in October

Veterans Day - November 11

_______________________

At first Table I below shows the E-MINI S&P 500 (ES)‘ performance (since 01/02/1990) concerning setups S1 to S5 -side by side- over the course of the then following 5 sessions assumed one would have bought the ES (S&P 500 futures) on close of the session immediately preceding the respective exchange holiday (E-mini S&P 500 Future’s day session). Setups S1 to S5 are defined as

Table I

  • Setup S1: New Year’s Day - January 1
  • Setup S2: Martin Luther King, Jr. Day – observed on the third Monday of January
  • Setup S3: Presidents Day - observed on the third Monday of February
  • Setup S4: Memorial Day - observed on the last Monday of May
  • Setup S5: Independence Day - July 4

20090523-ES-1

Table II

  • Setup S1: Labor Day - observed on the first Monday in September
  • Setup S2: Thanksgiving Day - observed on the fourth Thursday of November
  • Setup S3: Christmas Day - December 25
  • Setup S4: buy on close 3 sessions before the last session of the month, sell on close of the 2nd session of the new month

20090523-ES-2

With a win/loss ratio of 11:8 and a profit factor of 2.71 compared to an at-any-time profit factor of 1.15 for the ES, the week after Memorial Day not only shows the highest probability for a higher close 5 sessions later, but the highest profitability (pay-off) off all 8 exchange holidays listed above as well. Additionally the end-of-month period shows as well a win/loss ratio and profit factor (1.63) well above the respective at-any-time probability for a higher close 5 session later and profit factor (1.13).

But due to the VIX’ (S&P 500 Volatility Index) peculiar behavior on Friday’s session – the VIX posted an intraday low of -2.49% below Thursday’s close, but completely reversed course and close up +4.10% on the day although the SPX closed almost unchanged -, I had a hunch that it would be worth some time and effort in order to check if the VIX would -as it regularly does- mirror (but negatively correlated) the ES mini’s bullish bias during Memorial Day week and would show a bearish bias respectively. But now comes the surprise …

At first Table III below shows the VIX‘ performance (since 01/02/1990) over the course of the then following 5 sessions assumed one would have ‘bought’ (hypothetically and for statistical purposes only, the VIX itself is no tradable asset) the VIX on close of the session immediately preceding Memorial Day (regularly the Friday before). The ‘Trigger’ column shows the VIX’ value on close of the session immediately preceding Memorial Day (like last Friday). ‘next session’ is the session immediately following Memorial Day and so on.

20090523-VIX-2

It is especially remarkable -to say the least- that the VIX closed up the sesion immediately following Memorial Day on 18 (!) out of the last 19 years, for an extraordinary hypothetical profit factor of 37.93 compared to an at-any-time profit factor for the VIX of 1.09 only, especially due to the extraordinary winn/loss ration of 18:1 and the fact that the VIX closed higher the next session +4.00% or (significantly) more on 13 out of the last 19 years (and +8% or more on 9 occurrences). Additionally the VIX was trading above the close of the session immediately preceding Memorial Day one week after Memorial Day with a probability and hypothetical ‘profit factor’ (magnitude of change on the upside compared to the downside) significantly above the respective at-any-time probability for a higher VIX close 5 sessions later and ‘profit factor’ as well.

Table IV below now shows the VIX‘ intraday performance (since 01/29/1993) concerning the open, high, low, close (compared to the previous’s session close) and close versus open on the next session (in this event Tuesday, May 26) immediately following Memorial Day.

20090523-VIX-3

If history is any indication concerning the VIX’ performance on Tuesday, May 26, the VIX may be looking forward to -from a historical and statistical point of view- one of it’s probably most bullish sessions (means up-trending VIX, not the major market indexes) of the year, if not THE session (will be suibject to a follow-up) with the highest probability for a higher open/high/low/close and magnitude of change (on the upside) as well. During the last 8 years, the least higher open on the session immediately following Memorial Day was +4.44%; since 01/02/1990 the VIX always posted a high above the previous session’s close, and in only 4 out of 19 years did the VIX post an intraday low below the previous session’s close at all while the VIX left an unfilled gap on the upside in the other 15 years .


P.s.: Due to the significance of the findings I thought of a data or programming issue and manually (double-)checked (and verified) at least the last 9 occurrences (since 2000).

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Bottom line:

  1. From a historical and statistical point of view, the week after Memorial Day regularly shows a positive bias concerning the probability for a higher close 5 days later and the respective profit factor as well.
  2. But -again from a historical and statistical point of view- the ‘asset’ with the most bullish bias (on the upside) during Memorial Day’s week may probably be the VIX. Regularly there is an inverse relationship (negative correlation) between the S&P 500 and the VIX, and a signifcant bullish bias concerning the VIX would spell more than trouble concerning the SPX’ performance over the course of the then following 5 sessions, but Memorial Day’ week seems to be a period in the market where this (negative) correlation is completely decoupled.

Successful trading,

Frank

Disclaimer: (Net) Long VIX futures at time of writing.

P.s.: WordPress recently implemented a Twitter widget, so I’ll regularly make some intraday updates as well using Twitter. If you’re interested in, please have a look at the blog during the trading session as well or subscribe directly to Twitter (recommended).

Filed under: Daily Update, Studies/Survey, , , , , , ,

S&P 500′ Historical Intraday Performance on Option Expiration

WE031672-klein

For those who love the numbers, the table below shows the S&P 500′ intraday performance stats on option expiration Fridays since 01/02/1990 (open, high, low and close in comparison to the session’s close immediately preceding option expiration, almost always Thursday).

20090515-oep

Is is notable that option expiration’s session itself is not an especially favorable time frame for the market, at least not in comparison to an average session and the respective at-any-time probabilities and odds.

On option expiration the SPX historically did not post a high above the previous session’s close as often as it -on average- did on an randomly chosen session (82.40% versus an at-any-time probability of 86.80% for a high above the previous session’s close), and the average winning trade on the close shows a profit of 0.63% compared to an at-any-time profit of 0.77% on a higher close. The profit factor as the sum of all profits divided by the sum of all losses with 0.87 on option expiration (that means one only would have won $0.87 for every dollar lost on option expiration) compared to an at-any-time profit factor of 1.07 clearly shows that -although option expiration week (!, not the session itself) represents a favorable time frame for the market- it regularly (in the long run) does not pay going long the SPX on close of the session immediately preceding option expiration’s Friday.

That DOES NOT mean that we won’t see a positive close on Friday’s session, but if you’d have always bought the SPX on close of the session immediately preceding option expiration and closed the trade on close of option expiration, you’d have lost money and fared worse compared to a ‘buy and hold’ approach or investing randomly with a one day investment period.

The following figure shows the SPX‘ (bell curve) distribution of profits and losses on option expiration (end-of-day gains/losses), and listed below are the intraday performance stats concerning option expiration’s session since 2003. The bell cure is slightly right-skewed, which means a bigger part of the distibution is concentrated on the left side (losses) of the distribution, which is also reflected by a profit factor below 1.

20090515-oeg

20090515-oel

Successful trading,

Frank

P.s.: WordPress recently implemented a Twitter widget, so I’ll regularly make some intraday updates as well using Twitter. If you’re interested in, please have a look at the blog during the trading session as well or subscribe directly to Twitter (recommended).

Disclaimer: Long BGZ (Daily Large Cap Bear 3x Shares) at time of writing.

Filed under: Studies/Survey, , , , , ,

Does Sector Index Out- or Under-Performance Really Matter ?

There are a lot of adages in the market, and some are related to index out- and/or under-performance compared to other major market or sector indexes and the respective implications for the market’s outlook over the course of the next couple of sessions or weeks.

Due to the fact that especially the most recent sessions were heavily affected by such performance figures (e.g. under-performance of the $SOX Semiconductor Index versus the $NDX, under-performance of the $SPXEW S&P 500 Equal Weighted Index versus the $SPX, and under-performance of the $BKX Banking Index versus the $SPX), I wanted to check if there is eny evidence in market’s history that such under-(out-)performance could possibly provide a tradable edge over the next couple of sessions, and if any such under-(out-)performance might show a better than average quality of forecast concerning the market’s performance over the next couple of sessions.

I checked for the following indexes and setups:

  1. $SPX S&P 500 Index (capitalization weighted) versus the $SPXEW S&P 500 Equal Weighted Index (Survey S1)
  2. $SPX S&P 500 Index versus the $BKX Banking Index (Survey S2)
  3. $SPX S&P 500Index versus the $NDX Nasdaq 100 Index (Survey S3)
  4. $SPX S&P 500 Index versus the $SOX Semiconductor Index (Survey S4)
  5. $NDX Nasdaq 100 Index versus the $SOX Semiconductor Index (Survey S5)

Methodology:

I checked if the n-day summation of the daily index versus index performance exceeds a specific bar (which more or less equals the index versus index under-(out-)performance over the course of n days)

Example: running 5-day summation of [(today's close(SPX) - yesterdays's close(SPX)) /yesterdays's close(SPX)  - (today's close(SPXEW) - yesterdays's close(SPXEW)) /yesterdays's close(SPXEW)]  > 5%
(which more or less equals the $SPX’ versus $SPXEW under-(out-)performance over the course of n days)

Study (exemplary)

  1. $SPX outperforms $SPXEW by at least 2% over the course of the last 5 sessions (Survey S1)
  2. $SPX outperforms $BKX by at least 5% over the course of the last 5 sessions (Survey S2)
  3. $SPX outperforms $NDX by at least 5% over the course of the last 5 sessions (Survey S3)
  4. $SPX outperforms $SOX by at least 5% over the course of the last 5 sessions (Survey S4)
  5. $NDX outperforms $SOX by at least 5% over the course of the last 5 sessions (Survey S5)

Assumption: Survey 2, 3, 4 and 5 should have negative implications concerning the SPX’ performance over the course of the following couple of sessions due to the significant under-performance of those sector indexes ($BKX, $SOX) which should lead the market on the upside (or on the downside).

Table I below shows the SPX‘ performance (since 01/02/1990) over the course of the following 5 sessions (means profit/loss 5 sessions after those sessions where the respective setups had been triggered) after surveys 1 to 5 had been triggered.

20090514-S1

For exemplary purposes, figure II shows the SPX‘ (bell curve) distribution of profits and losses over the course of the following 5 sessions concerning survey 5 ($NDX outperforms $SOX by at least 5% over the course of the last 5 sessions). The bell curve is slightly left-skewed, which means a bigger part of the distribution is concentrated on the right -the profit side- of the figure. The bottom line is that there is NO historical evidence that any under-performance of the $SOX Semiconductor Index versus the $NDX Nasdaq 100 might have negative implications for the S&P 500‘s performance over the course of the following 5 sessions.

20090514-S15g

And the same conclusion holds true if checked against the $NDX’ (not $SPX’) performance over the course of the following 5 sessions. Figure II shows the NDX‘ (bell curve) distribution of profits and losses over the course of the following 5 sessions concerning survey 5 ($NDX outperforms $SOX by at least 5% over the course of the last 5 sessions). The bell curve is again slightly left-skewed, which means a bigger part of the distribution is concentrated on the right -the profit side- of the figure. The bottom line is that there is NO historical evidence that any under-performance of the $SOX Semiconductor Index versus the $NDX Nasdaq 100 might have negative implications for the Nasdaq 100‘s performance over the course of the following 5 sessions.

20090514-S15gndx

Over the last 5 sessions the $SPX has lost -3.9% while the $SOX has lost -12.5%. So I additionally checked for those occurrences where the $SOX under-performed the $SPX by at least -8.0% during the last 5 sessions, and the respective implications concerning the $SPX’ performance over the course of the next couple of sessions.

Table I below shows the SPX‘ performance (since 01/02/1990) over the course of the following 5 sessions whenever the $SOX had under-performed the $SPX by at least -8.0% during the last 5 sessions.

20090514-S2

Win/Loss Ratio and profit factor do NOT (significantly, if at all) differ from the respective at-any-time probabilities and odds, so again there is no statistical evidence that any tremendous under-performance of the $SOX versus the $SPX  like the -8.0% we just experienced has negative implications concerning the $SPX’ performance over the course of the next couple of sessions in comparison to the respective at-any-time probabilities and odds for a higher/lower close and profits/losses up to 5 sessions later.

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But now the other way around: Does any significant out-performance of the $SOX or $BKX versus the $SPX and/or $NDX have positive implications for the major market indexes’ performance over the course of the next couple of sessions ?

Study (exemplary)

  1. $SPXEW out-performs $SPX by at least 2% over the course of the last 5 sessions (Survey S1)
  2. $BKX out-performs $SPXby at least 5% over the course of the last 5 sessions (Survey S2)
  3. $NDX out-performs $SPX by at least 5% over the course of the last 5 sessions (Survey S3)
  4. $SOX out-performs $SPX by at least 5% over the course of the last 5 sessions (Survey S4)
  5. $SOX out-performs $NDX by at least 5% over the course of the last 5 sessions (Survey S5)

Assumption: Survey 2, 3 4 and 5 should have positive implications for the SPX’ performance over the course of the following couple of sessions due to the significant out-performance of those sector indexes ($BKX, $SOX) which should lead the market on the upside.

Table II below shows the SPX‘ performance (since 01/02/1990) over the course of the following 5 sessions (means profit/loss 5 sessions after those sessions where the respective setups had been triggered) after surveys 1 to 5 had been triggered.

20090514-S3

Contrary to what one might have expected concerning a significant positive outcome, the S&P 500 did NOT perform better than random even if those ‘leading’ sector indexes like the $SOX and $BKX significantly outperformed during the last couple of sessions.

And although the following figure III which shows the NDX‘ (bell curve) distribution of profits and losses over the course of the following 5 sessions concerning survey 5 ($SOX outperforms $NDX by at least 5% over the course of the last 5 sessions) might suggest that the bell curve would be slightly left-skewed, which would mean that a bigger part of the distribution would be concentrated on the right -the profit side- of the figure (indicating a more bullish outcome for the $NDX over the course of the next 5 session), the bell curve shows a long tail on the left side (with losses exceeding the -10% mark)  for an overall profit factor of 0.83 only (sum of all profit divided by the sum of all losses).

20090514-S35g

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Bottom line:

The stats shown above are for exemplary purposes only. I checked survey 1 to 5 for different investment periods and different bars, but probabilities and odds only slightly differed from each other and never signifcantly changed the following conclusions (in compariosn to the respective at-any-time probabilities and odds):

  • any under-performance of the $SOX versus the $SPX and/or $NDX does -from the market’s historical perspective- NOT have any negative implications for the S&P 500′ and Nasdaq 100′ performance over the course of the next couple of sessions, as any significant out-performance does NOT have any positive implications concerning the major market indexes’ short-term performance.
  • any under-performance of the $BKX versus the $SPX shows some slightly negative implications concerning the probabilities for a higher $SPX close 5 sessions later, but not concerning the odds (profit factor / expectancy), and
  • any under-performance of the $SPXEW versus the $SPX in fact shows (being part of a couple of my previous posts) (significant) negative short-term implications concerning the probabilities and odds for a higher $SPX close one and two days later.

But although -averaged over the course of the last 20 years- there is no statistical evidence that any significant out- or under-performance of the $SOX and/or $BKX versus the $SPX and/or $NDX had significant (if any) positive or negative implications concerning the short-term performance of the major market indexes, there might have been shorter time periods in the market during which such out-/under-performance in fact showed any positive or negative implications.

Successful trading,

Frank

P.s.: WordPress recently implemented a Twitter widget, so I’ll regularly make some intraday updates as well using Twitter. If you’re interested in, please have a look at the blog during the trading session as well or subscribe directly to Twitter (recommended).

Filed under: Studies/Survey, , , , ,

Trading the Odds on Thursday – May 14, 2009

On Wednesday’s session the market confirmed it’s historical (negative) tendency to close lower the session after the S&P 500 outperformed the $SPXEW S&P 500 Equal Weight Index by a wide margin of +1.17% on a single session and/or +0.75% on two consecutive sessions (both setups were triggered on Tuesday’s close), and obviously it didn’t matter that -on the contrary- those 5 occurrences in 2009 showed a positive tendency (see my postings Trading the Odds on Wednesday – May 13, 2009).

The S&P 500 closed lower -2.69% on the day, and breadth was notably weak with NYSE Advancing Issues / Declining Issues at 0.18 (1:5) and NYSE Advancing Volume / Declining Volume at 0.04 (1:25, means 25 times as much volume went into declining stocks as in advancing stocks).

Something to keep in mind for the remainder of the week is the fact that this is option expiration week which is regularly a positive time frame for the markets. Table I below shows the SPX‘ performance over the course of those 5 sessions immediately preceding option expiration on the third Friday of every month (if one would have bought the index on close of the trading day 5 sessions before option expiration, which is regularly the Friday of the previous week), and figure II shows the (bell curve) distribution of profits and losses over the course of those 5 sessions assumed one would have bought the SPX 5 sessions before option expiration’s Friday, and closed the trade on option expiration Friday’s close (slightly left-skewed, which means the majority of the distribution is concentrated on the right -profit side- of the figure). Due to the fact that the SPX is currently (since last Friday’s close) down -4.88% on day three of this hypothetically -and for statistical purposes only- trade (and therefore close to 2 standard deviations away from the ‘mean’), probabilities and odds seems to be significantly tilt in favor of a (major) market rebound on Thursday and/or Friday this week, but there is a significant ‘but‘ (at the bottom of the post before the ‘bottom line’).

20090513-oew-p

20090513-oew-g

The last approximately 80 hypothetically -and for statistical purposes only- trades are are listed in Table III below, showing the SPX‘ behavior and respective performance over the course of the then following 5 sessions assumed one would have bought the SPX 5 sessions before option expiration’s Friday, and closed the trade on option expiration Friday’s close.

20090513-oew-l

Additionally I checked for those occurrences when this hypothetically trade was more than -4.5% under water on day three during the last 5 sessions before option expiration Friday (means the SPX was trading lower at least -4.5% below it’s close on the 5th day before option expiration), see table IV below. The significant ‘but‘ mentioned above is the fact that there were 6 occurrences since 01/02/1990 which fulfilled the condition mentioned before, and on only 1 session was the SPX able to complete recoup all it’s previous losses during expiration week, one occurrence saw a small gain between day three and day 5, and on 4 occurrences already accrued losses were extended which wouldn’t bode well for the SPX’ outlook concerning the close on Friday this week.

20090513-oew-l2

Added subsequently: Due to the fact that breadth was more than notable weak (NYSE Advancing Volume / Declining Volume at 0.04, means 25 times as much volume went into declining stocks as in advancing stocks) I quickly checked for those occurrences where NYSE Advancing Volume / Declining Volume closed below 0.05 (see stats and listing below). This further supports the assessment that the market will probably start a (major) rebound on Thursday’s session (17 winner, 4 looser since 01/02/1990 on the next session;an intraday high with regularly +2.0% above the previous session’s close, and only one session with a loss on the close in excess of -1.25%).

20090513-oew-breadth

________________________________

Bottom line:

  1. Due to the fact that expiration week is regularly a favorable time frame for the markets, and the SPX is already down -4.88% during expiration week, probabilities and odds will probably favor a (major) rebound on Thursday’s and/or (but less probable) Friday’s session.
  2. The notable weak breadth on Wednesday’s session additionally supports the assessment that the market will probably see a (major) rebound on Thursday’s session (at least intraday during Thursday’s session).
  3. Although the sample size is very small (6 occurrences only out of 232 expiration weeks), the ‘but’ comes with the fact that whenever the SPX was down more than -4.50% on day 3 during expiration week, it regularly extended it’s losses until expiration Friday. So any rebound on Thursday’s session could be followed by another sell-off on Friday’s session, so one should probably not overstay ones welcome on the long side on Thursday’s session and take whatever the market may provide on the long side on Thursday’s session.

Successful trading,

Frank

P.s.: WordPress recently implemented a Twitter widget, so I’ll regularly make some intraday updates as well using Twitter. If you’re interested in, please have a look at the blog during the trading session as well or subscribe directly to Twitter (recommended).

Disclaimer: Long BGU (Daily Large Cap Bull 3x Shares) at time of writing.

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The information on this site is provided for statistical and informational purposes only. Nothing herein should be interpreted or regarded as personalized investment advice or to state or imply that past results are an indication of future performance. Under no circumstances does this information represent an advice or recommendation to buy, sell or hold any security.

The author of this website is not a licensed financial advisor and will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on the content of this website, including the information that others post here.

While every effort will be made to provide complete, the most accurate and current information, none of the information on this site is guaranteed to be correct, and anything written here should be subject to independent verification. I make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to this blog or the information, analysis, statistics, or related graphics contained on the blog for any purpose.

I may or may not hold positions for myself, my family and/or clients in the securities mentioned here. Actions may have been taken before or after information is presented, and any opinions expressed in this site are subject to change without notice.

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