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 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.

Advertisements

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

2 Responses

  1. moneyfriend says:

    Great work! I really like the format of your latest posts.

  2. Douglas says:

    Thanks Frank. Very interesting.

    You seem to me to be looking at what happens over the following few days rather than looking for the characteristics of intermediate tops / bottoms. I do a lot of work with excel and find that the models I have built up recently work well during a bear market but very differently during a bull (not surprising that the market behaves differently). So recently I have been very concerned to find out if we are still in a bear market (looking purely at technicals – because I know what I think from looking at the fundamentals….).

    Was interested in your comment about weak breadth. Will look at those dates myself because I am interested in where this fits in the wider scheme of things. A glance at the dates is quite interesting.

    I imagine that extremes like that would coincide with an emotional market.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Twitter Updates

Error: Twitter did not respond. Please wait a few minutes and refresh this page.

DISCLAIMER

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.

Please read the full ... DISCLAIMER

Calendar

May 2009
M T W T F S S
« Apr   Jun »
 123
45678910
11121314151617
18192021222324
25262728293031
%d bloggers like this: