Technical Trading

Do often frenzied investors/traders tend to overdo buying and selling, coming to their senses shortly thereafter? In other words, does the broad U.S. stock market tend to revert after short-term moves up or down? To check, we relate sequential past and future return intervals of 1, 2, 3, 5, 10, 15 and 21 trading days. To avoid overlap of observations (and ensure a trader could exploit all of them), we sample at frequencies matching return measurement intervals. For example, for a 5-day return interval, we sample every fifth trading day. Using daily closes of the S&P 500 Index over the period January 1990 through most of September 2011, we find that: More…

Several readers have inquired about the performance of Sy Harding’s Street Smart Report Online, which includes the Seasonal Timing Strategy. This strategy combines “the market’s best average calendar entry [October 16] and exit [April 20] days with a technical indicator, the Moving Average Convergence Divergence (MACD).” According to Street Smart Report Online, applying this strategy to a Dow Jones Industrial Average (DJIA) index fund generated a cumulative return of 151% during 1999-2010, compared to 56% for the DJIA itself. As a robustness test, we apply this strategy to the S&P Depository Receipts Trust (SPY) exchange-traded fund since its inception. Using daily dividend-adjusted closing prices for SPY and the daily 13-week Treasury bill (T-bill) yield from 1/29/93 (the earliest available for SPY) through 9/9/11, we find that: More…

A reader suggested reviewing the detailed track record of SweetSpot Investments LLC, consisting of 29 closed trades over the past 12 years. The basic SweetSpot strategy posits market-beating three-year reversion of the three least popular “sectors” out of 100 formed from 500 non-diversified mutual funds and exchange-traded funds (ETF). Popularity is a function of fund assets and prior-year fund flows and returns. From a practical perspective, this strategy results in a steady-state portfolio of nine “sector” funds, each year selling the three oldest holdings and adding three new ones. Since 2009, the strategy includes as a hedge a short position in a market index fund or a position in an inverse market index fund “whenever the market’s intermediate-term trend falls below its long term trend.” The detailed track record includes no trades since that change in strategy. Using results from 29 SweetSpot trades from the end of 1998 through the beginning of 2011, we find that: More…

Does a strategy of combining monthly individual stock return reversal with monthly industry momentum enhance results compared to the separate strategies. In their August 2011 paper entitled “One-month Individual Stock Return Reversals and Industry Return Momentum”, Marc Simpson, Emiliano Giudici and John Emery examine the relationship between individual stock return reversals and industry momentum by considering three strategies: (1) a conventional reversal strategy that each month buys (shorts) individual stock losers (winners); (2) a simple industry momentum strategy that each month buys (shorts) the previous month’s winning (losing) industry portfolio; and, (3) a combined reversal-industry momentum strategy that buys (shorts) the losing (winning) stocks within the previous month’s winning (losing) industry portfolio. Using monthly returns, SIC codes and the Fama-French definitions for ten industries over the period January 1931 through December 2010 (960 months) , they find that: More…

Are financial market returns from extreme outlier days mostly good or bad for investors? Is the occurrence of such days usefully predictable? In his August 2011 paper entitled “Where the Black Swans Hide & The 10 Best Days Myth”, Mebane Faber examines the effects and predictability of daily market return outliers. Using daily returns for the broad U.S. stock market for September 1928 through December 2010 and shorter samples through 2010 for 15 other country stock markets (as in “The (Worldwide) Futility of Market Timing?”), he finds that: More…

As described in “Monthly Stock Return Reversal Update”, evidence for a conventional monthly stock return reversal effect since 1990 is weak. Is there a way to enhance the effect? In their August 2011 paper entitled “Short-Term Residual Reversal”, David Blitz, Joop Huij, Simon Lansdorp and Marno Verbeek present a short-term reversal strategy based on deviations of individual stock returns from a rolling 36-month Fama-French three-factor (market, size and book-to-market) model (residuals) rather than raw returns. They standardize (suppress noisiness of) these residual returns by dividing them by their standard deviations over past 36 months. The past winner (loser) portfolio of the residual reversal strategy consists of the tenth of stocks with the highest (lowest) standardized residual returns. Using monthly returns and risk factors for common U.S. stocks priced above $1 with market capitalizations above the NYSE median over the period January 1926 through December 2008, and estimates of institution trading frictions for 1991-1993, they find that: More…

When do simple moving averages (SMA) serve as useful trading rules? Do they exploit some hidden pattern in asset price behavior? In their July 2011 paper entitled “The Trend is not Your Friend! Why Empirical Timing Success is Determined by the Underlying’s Price Characteristics and Market Efficiency is Irrelevant “, flagged by a subscriber, Peter Scholz and Ursula Walther investigate the relationship between the performance of technical trend-following rules and the characteristics (statistics) of the target asset return series. They use timing rules based on SMAs of different intervals (5, 10, 20, 38, 50, 100 and 200 trading days) as examples of trend-following rules. They consider the effects on SMA rule performance of variations in four asset price series statstics: the first-order trend (drift); return autocorrelation (return persistence); volatility of returns; and, volatility autocorrelation (volatility persistence/clustering). Analyses are long-only and ignore trading frictions, dividends, return on cash and buffering tactics such as stop-loss. They use a robust array of risk and performance measures to compare SMA rule performance to a buy-and-hold approach. Using both simulated price series and ten years of daily prices (2000-2009) for 35 country stock market indexes, they find that: More…

Do simple moving averages (SMA) commonly used to identify stock market regimes work similarly for the spot gold market? To investigate, we consider two regime indicators: the 200-day SMA and a combination of the 50-day and 200-day SMAs. Using daily London afternoon spot gold prices (and, for comparison, daily closes of the S&P 500 Index) over the period January 1973 through mid-August 2011, we find that: More…

Is the monthly stock return reversal effect currently exploitable? In the August 2011 version of their paper entitled “New Evidence on Short-Term Reversals in Monthly Stock Returns: Overreaction or Illiquidity?”, Chris Stivers and Licheng Sun investigate the persistence, size-sensitivity and seasonality of monthly stock return reversal in the context of three competing explanations: (1) investor overreaction to news (exploitable); (2) market illiquidity (perhaps unexploitable); and, (3) large stocks lead small stocks (exploitable). They evaluate simple value-weighted and equal-weighted prior-month loser-minus-winner (LMW) strategies based on a sort of prior-month returns, and five more complex equal-weighted LMW strategies based on double-sorts of prior-month returns and market capitalizations. Using monthly return and market capitalization data for a broad sample of U.S. stocks and 30 industries over the period February 1926 through December 2010, they find that: More…

A reader proposed: “I recently found something interesting while analyzing the ratio of the equal-weighted S&P 500 Index to its market capitalization-weighted counterpart. Whenever this ratio declines (out of an uptrend), the market crashes (July 2007, September-October 2008, July 2011). Also, when this ratio starts rising, the recovery commences (April 2009). The indicator seems to warn of problematic times ahead. …Perhaps this ratio provides insight into whether money is moving into the market (ratio rising) or out of the market (ratio falling). Could you take a look at this to see whether this ratio is a great indicator?” To investigate, we employ S&P 500 SPDR (SPY) and Rydex S&P 500 Equal Weight (RSP) as tradable proxies for the capitalization-weighted and equal-weighted S&P 500 Index, respectively. Using weekly and monthly dividend-adjusted values of SPY and RSP from the end of April 2003 (limited by data for RSP) through July 2011 (473 weeks), we find that: More…