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.

Trading the Odds on Friday – April 3, 2009

Trading the Odds on Friday – April 3, 2009

On Thursday’s session the market closed up again on a strong note, up +2.87% on the day (S&P 500), and up the third day in a row.

But especially remarkable today was that fact that the S&P 500 significantly underperformed the S&P 500 Equal Weighted Index, and outperformed the AMEX Institutionl Index, both by a wide margin (-1.59% and +0.75% respectively).

“The AMEX Institutional Index is a capitalization-weighted index of 75 stocks most widely held as equity investments among institutional equity portfolios. The index is designed to reflect the performance of their core stock holdings.” (Source: AMEX)

Due to the fact that the S&P 500 is a capitalization-weighted index as well, while with respect to the S&P 500 Equal Weighted Index all stocks are (naturally) equally weighted, any underperformance of the S&P 500 versus the S&P 500 indicates a (significant) underperformance of the highest capitalized stocks (regularly those being part of core portfolios of institutional investors) in comparison to the less capitalized stocks.

Regularly the S&P 500, the  S&P 500 Equal Weighted Index and the AMEX Institutional Index are more or less in sync concerning their daily performance (with regularly only minor deviations), but I wanted to look for those divergences when -on a solid up day in the market- the S&P 500 Equal Weighted Index outperformed the S&P 500 and the AMEX Institutional Index underperformed the S&P 500 by a wide margin of at least +0.75% and -0.50% respectively, to inspect the S&P 500′ performance over the course of the next 10 sessions (in order to gauge if this underperformance of stocks held as investments by institutional investors might provide any tradable edge).

The following table shows the S&P 500‘ behavior and the respective performance of those 12 occurrences/trades since 10/03/2007  when the S&P 500 closed up on the day, but the AMEX Institutional Index underperformed by at least -0.50% (assumed one would have bought the S&P 500 on close of the day the signal was triggered):

survey-20090402-41

(click on image to enlarge)

Now the same table, but this time concerning the S&P 500‘ behavior and the respective performance of those 16 occurrences/trades since 10/03/2007  when the S&P 500 closed up on the day, but the S&P 500 underperformed the S&P 500 Equal Weighted Index by at least -0.75% (assumed one would have bought the S&P 500 on close of the day the signal was triggered):

survey-20090402-3

(click on image to enlarge)

Bottom line:

Although the sample size is still small (12 and 16 occurrences), since 10/01/2007 the S&P 500 shows -compared to the respective at-any-time-odds- a short-term negative tendency with -over the course of the following 10 sessions- loosing trades exceeding the number of winning trades, the average gain per trade lower than the average loss per trade and a profit factor (sum of all gains divided by the sum of all losses) significantly below the respective at-any-time profit factor -at least over the course of the following 5 sessions-.

Additionally the S&P 500 triggered the ‘6 Highs’ setup explained in my posting Trading the Odds on Friday – March 27, 2009, which is a -from the market’s history and statistical perspective- short-term (next session) negative for the market.

Successful trading,

Frank

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Filed under: Daily Update

2 Responses

  1. 4best4worst says:

    Another great post.

    Curious if you could do any analysis on how these sorts of set ups play out at the beginning of “official bull markets”

    Just wondering if the tendency for stock prices to keep moving up way faster than normal changes the wins/losses versus analysis like the above in general.

    just a thought…. please keep up the great work….

    Maximus
    http://4best4worst.wordpress.com/

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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.

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