Prior study results indicate it is more profitable to buy ahead and sell to the crowd that try to play "End of Month" strategy. You can find prior study
here. This post looks at calendar strategy edge by regime (bull market, bear market). The general idea (and the sequence this post series will take) is to first understand thoroughly the nature of edge and then craft a profitable strategy.
By understanding nature of edge, I mean understanding how does the edge manifest in bull and bear markets? how does it manifest under high and low volatility environments? how about when the trend is in early stages? how about when in late stages?
I think often people read about some idea/setup but then don't spend much time in actually verifying it or understanding the nature of the edge. Also I haven't seen much info on the net that goes beyond surface on "End of Month" strategy. If you come across then please let me know. Coming back to post, following is one simple way to define the regimes.
 |
| Bull Market Regime Results | |
|
Regime Definition:
Bull Regime: Price > 200 day MA.
Bear Regime: Price < 200 day MA.
Test in Bull Market Regime
Buy @ market the next day open and sell after 5 days only if Price is above 200 day MA. Test Duration: 1970 - Current.
Test in Bear Market Regime
Buy @ market the next day open and sell after 5 days only if Price is below 200 day MA. Test Duration: 1970 - Current.
 |
| Bear Market Regime Results |
Caveats:
As usual results are friction-less (i.e., no commissions, no slippage). Parameters are not optimized. The test is on the index itself so that longer duration can be covered.
For Readers:
I think results under bear market regime are interesting. It appears the edge is more pronounced during bear markets relative to other days of the month. Any thoughts? Also curious to hear your inferences from the results.
Wish you all good health and good trading!
I was looking at an "End of the Month" strategy and thought it would be interesting to generate various performance stats for S&P 500 market by day of the month. In this post the test is done without applying any regime (bull market, bear market) filters or volatility filters. I will post those studies later in the week depending on the reader interest. The tests cover last 40 years of S&P 500 index.
Now the results do seem to confirm there is a positive bias for end of the month. But contrary to popular wisdom, it seems to me that 1-1.5 weeks
before end of the month is
more profitable then the actual end of the month. You can see the results at the end of the post.
Test:
Buy @ market the next day open and sell after 5 days. Fairly simple rule as we are not yet using regime filters but still provides quite interesting stats. Test duration: 1970 - Current.
Caveats:
Results are friction-less (i.e., no commissions, no slippage). Parameters are not optimized. The test is on the index itself so that longer duration can be covered.
Question to Readers:
Rather than contaminating your view with my own, thought it might be interesting to just present the results as is and wait for your thoughts. I look forward to hear your inferences from the result data and any suggestions.
Wish you all good health and good trading!
Note: This post (or for that matter any information on this blog) is not an advice. In trading, one can lose more than they think. So please do your own due diligence.
I think the worst time to buy an IPO is on & soon after IPO date. For example, say you want to buy a car/home. Who would get a better deal (seller/buyer?) if you buy on the day the seller came up after employing several experts to identify most promising day for him. Also after seller spent millions of dollars to shore up demand for improving seller odds. How is that different for an IPO?
IMO best time to play IPOs is after the stock forms 1st base which happens typically after 6+ months since IPO date. This allows sufficient time for the stock to fade away from public and also clear up extra supply. Then if market and stock fundamentals are good, the real move starts. The chart has additional details. Your thoughts?
Recently I read an interesting journal paper on Volatility. Many people typically equate volatility with risk and view it as something to avoid/unavoidable. On other hand, there are ways one can systematically harvest and profit from volatility. I am not talking about gains from timing skill or choosing right stock etc. This topic is more about systematically harvesting the volatility of the underlying stock/asset to make additional profits.
I like reading articles on Psychology and Behavioral Economics. Following are some interesting articles I came across this week. Just FYI - some articles may not be directly relevant to trading.
Articles:
Please let me know any Psychology or Behavioral Economics blogs that you visit regularly.
If you have not read already, it will be useful to read this prior study on
Pair Switching.
Now one mistake that happens often with Asset Allocation, Asset Rotation and Pair switching models is
ignoring the dynamic nature of correlations between the assets in the portfolio. I think often one makes this mistake in one of two ways -
- One considers two assets as having low correlation just because they have different asset names and appear conceptually belonging to two different segments. Examples: US & International equities; Large Cap & Small Cap. Now these assets do have low correlation some times but correlation numbers in recent years tell a different story from popular wisdom.
- Another way one can make a mistake is assuming correlations are static and will continue to be that way. Actually many probably many not even investigate correlations and just accept popular knowledge as truth. Example: Stocks & Bonds. One has to just look at Spain to see how correlated they are (i.e., both stocks and bonds going down together) recently. Similarly for US, in recent years the Stocks & Bonds are less correlated (due to Risk On-Risk Off game?). But I think in 90s Stocks and Bonds had high correlation for some periods.
So how can one design so that the investor steps aside the above two mistakes?
Most of the sound bytes recently are focused on Euro or Volatility or Social networking stocks.We don't hear much about global food shortage and grain markets much in the media. Agriculture and grains forming nice chart setups. Couple of annotated charts below - JJA and GRU.
My primary source of information for trading markets is
WallStreetCurrents. Often people gloss over but I think streamlining and being efficient in keeping track of markets, gathering and digesting relevant information will go a long way in helping one's trading. Given this is a daily activity, any efficiency gains here would quick multiply.
It doesn't matter whether one uses
WallStreetCurrents or some other site that resonates more with you. Key is filtering noise, being efficient and being structured in gathering data and doing analysis. Coming back to topic of this post,
WallStreetCurrents has a new addition.
Among the published weekly studies on the blog, this technique is probably the most simplest.
I knew concept has a positive edge. But was bit surprised by the amount of out-performance over the underlying index (i.e.,
excess returns & lower draw downs) after applying the technique.
Core Idea - Outperform the market by systematically switching between the underlying market (say SP500) and bonds (say US Long term treasuries) following objective rules.
Note: This is not pairs trading where you buy one and short the other. Here we are just doing switching/rotation.
This out-performance is not specific to S&P500 i.e., noticed similar out-performance for other markets like Russell 2000 and MSCI EAFE. Results for all three indexes are available at the end of the post.
The post contains two simple systems with rolling annual correlation between
-0.5 to 0.35. This allows one to leverage the account for higher returns while maintaining lower max draw down then the individual systems. Stats are available later in the post. The test duration is from 1980 to Current.
Interesting part is these two systems operate on
same market (S&P500),
same time frame (i.e., daily), in
same direction (i.e., only bull markets),
only long trades, with
same entry setup but
different exits. Results are similar on other two indexes as well.
I think every one with a retirement account will benefit from reading this paper (link below). Another paper that one probably should also read is Mebane Faber's paper. I posted the other paper sometime back and is available under "Quantitative Systems" label. So what is special about this particular paper?
