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 Wednesday – May 13, 2009

Posting will resume from today onward, although the transition to Matlab® is far from being completed, but I’m at least able to produce most of the figures and stats (with respect to the quantity and hopefully quality as well) via Matlab as I’m able to produce via Excel (and to which you are used to). Taking full benefit of all of Matlab’s capabilities will take a long(er) time, and although I’ve an university degree in computer sciences, it is a long time ago that I did some programming.

Today’s report is still  short (with respect to the number of setups under investigation), but that will change back to normal mode over the course of the next couple of days.

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Notable on Tuesday’s session was the fact that the S&P 500 outperformed the $SPXEW S&P 500 Equal Weight Index by a wide margin of +1.17%, and therewith the second day in a row by a margin of at least +0.75% (The S&P Equal Weight Index is the equal-weighted version of the S&P 500. The index has the same constituents as the capitalization weighted S&P 500, but each company in the SPXEW is allocated a fixed weight 0f 0.20%, rebalanced quarterly. The S&P Equal Weight Index measures the performance of the same 500 companies, in equal weights.. See AMEX). In other words: The heavy capitalized stocks in the S&P 500 -usually over-weighted in institutional portfolios- outperformed the less capitalized stocks in the index by a more than unusual wide margin.

Since 01/02/1990 there were 5 occurrences (unfortunately a small sample size only) where the S&P 500 outperformed the $SPXEW S&P 500 Equal Weigth Index on two consecutive sessions by a wide margin of at least +0.75%. Although the way too small sample size doesn’t allow for reading any statistically significant into it, is it nevertheless noteworthy that on 4 (and the last four) out of those 5 sessions the SPX closed lower the next session.

The following table shows 1) the SPX‘ behavior and the respective performance over the course of the next couple of sessions which fulfilled the setup mentioned above, and 2) the performance stats in comparison to the respective at-any-time odds and probabilities. Intraday performance stats (open, high, low and close vs. open on the next session will probably be available and provided from the next posting onward). (now included)


20090513-SPXEW-3

In order to possibly increase the sample size, I checked for those occurrences where the S&P 500 outperformed the $SPXEW S&P 500 Equal Weight Index by a wide margin of +1.17% on a single session only (like Tuesday’s session). Concerning the time frame since 01/02/1990 the negative outlook for Wednesday’s session (with respect to historically probabilities and odds) wouldn’t change, but there is a light at the end of the tunnel due to the fact that concerning those occurrences in 2009 only (the top 5 in the stats below)  probabilities and odds are tilt in favor a higher close on Wednesday’s session. On those 5 occurrences in 2009 the SPX closed higher on 3 sessions, and gains on the upside (+2.13%, +1.31% and +4.35%) far exceeded the losses on those 2 sessions where the SPX closed lower (-0.27% and -0.64%).

20090513-SPXEW

20090513-SPXEW-2

And if in doubt, I’d give the most recent occurrences more weight than any occurrences a decade or more in the past (like utilizing an EMA Exponential Moving Average for probabilities and odds instead of using an SMA Simple Moving Avergage). But this divergence between historical and the most recent instances shows that any tradable setup might completely reverse it’s up to then most probable outcome depending on the then current environment.

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Bottom line:

  1. At least concerning the setup triggered on Tuesday’s session concerning the SPX’ out-performance over the SPXEW, probabilities and odds for a higher close on Wednesday’s session are somewhat mixed (historically and therefore overall negative, but most recent occurrences positive), but with respect to those occurrences in 2009 only probabilities and odds might be tilt in favor of a higher close on Wednesday’s session, and downside potential on a possibly lower close will probably be limited.

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).


Matlab ® is a registered trademark of The Mathworks, Inc.

Disclaimer: No positions in the securities mentioned in this post at time of writing. I do not have any interests with the company and/or their products mentioned above, and I do not get any kind of benefits by mentioning the company and/or their products. They do not even know that I’ve listed them here.

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One Response

  1. moneyfriend says:

    Great to see you back & thank you for the report.

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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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