The 30% Selloff Signal: What History Tells Us About Market Recoveries

I was talking to my trading buddy and he mentioned that he read that 40% of Russell 3000 stocks are 30% or more off their 52-week high. To us that sounded really bad. But as usual, we asked is it? Or is this normal when we finally cross under the 200-day moving average after a long time being above it.

Going into this, I had lots of questions. How is this stat on the S&P500 stocks? How has the market done 6 to 12 months later compared to the average? Is the difference in performance significantly different from the average? Do we have enough occurrences of this pattern?

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SPY, SSO and TLT Strategy

A reader sent a strategy to test which is a basic monthly rotation strategy between stocks and bonds. What caught my attention was the use of SSO, the 2x of S&P 500. The main idea being to use SSO when in a low volatility bull market.

Looking over the rules, I could tell this strategy was created before the recent bear market in bonds.

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Bear Markets Through the Decades

Several months ago, Steven (my trading buddy) and I were talking about bear markets. I felt that bear markets seem shorter and shallower now compared to the past. I thought this would be a quick and easy research project and blog post. Nope. As I generated numbers, more questions and research paths would be generated.

My questions are

• Are bear markets shorter?
• Are bear markets shallower?

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Sell in August and Go Away

I was going through some old issues of Technical Analysis of Stocks & Commodities looking for some ideas to test. In the November 2019 issue, I came across “Stock Market Seasonality: A Global Phenomenon” by Jay Kaeppel. The basic idea was that global markets share the same “buy in November and sell in May” phenomenon as the US market.

This got me thinking about how markets have changed since 2012 or so. My theory is that before 2012, this pattern was better than either buy and hold or other start and end months. But after this time, buy and hold or longer hold dates would be better. The reason is that the Fed is involved in the market more and keeping bear markets much shorter.

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UPRO/TQQQ Leveraged ETF Strategy

Recently a reader sent me a leveraged ETF strategy that he wanted tested for the blog. Over the last couple of months, I have been noticing renewed interest in leveraged ETF trading. More clients are coming to me to test out leverage trading ideas. I have been testing my own ideas. What I liked about this strategy is that it moved between leveraged ETFs, non-leveraged ETFs and TLT.

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Mean Reversion vs Trend Following Through the Years

Something I am always thinking about is how the markets are behaving now vs the past few years vs several years ago. My edge on the strategies I trade depends on two main ideas. One, current market behavior is similar to what I tested on which is normally the last 5-10 years. Two, not too many others have found the same edge. Unfortunately for (2), more and more people are trading quant style and edges are harder to find and smaller when I do find them. The only thing I can control is continuing to research for new strategies.

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2023 Rally – How Strong Is It?

This end of year rally which started on October 2023 has been strong. My trading buddy and I started wondering how this compares to the past. Is this a “normal” strong rally or an “abnormally” strong one?

Determining this is always tough because it depends on the indicators you use. Because of that, I tried lots of them. This will be a post short on words but with lots of tables.

Where are we now?

Data is from 1/1/1980 to 12/19/2023. The close of 12/19/2023 was the 36th day of the rally. These are the stats based on these last 36 days.

• 18 days with RSI2 over 90
• 6 days with RSI2 over 99
• 20 days with RSI4 over 80
• 27 days with the close above the previous day’s close
• 5 days with close above the upper Bollinger Band(15,2)
• 15.8 total return in those 36 days

Over the last 44 years, these are the average returns for all days for 5, 21, 63, 126, and 252. My main focus is on 126 & 252 days later.

For each of the above stats, we will look at when it happened in the past and how the market did later. I ignore signals that happen within 21 days of the last one.

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Sector Rotation Strategy: Should Trading Rules Make Sense?

I was doing my usual reading when I came across a sector rotation strategy. I have seen lots of these strategies but this one had a different twist. The strategy was a momentum strategy but instead of buying the top three, it was buying the middle three. The article gave no reason other than it works and gives the best results.

In general, people fall into two camps about trading rules.

1. The trading rules need to make sense on why they are there.
2. Don’t care about the rules if the stats are good and over-fit tests pass.

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Reducing Whipsaws When Using 200-day Moving Average for Market Timing

I was working on testing a market timing indicator that I read about it. It was showing some promise and the next step was to compare it to my benchmark. My benchmark is using the 200-day moving average. But an additional rule removes a lot of the whipsaws that can happen.

After doing the comparison, the market timing indicator compared well. But then I realized I had not written a blog post about my additions. I touched on it in the Market Timing with a Canary, Gold, Copper, LQD, IEF and much more post.

For me, the goal of using the 200-day MA to trade the SPY is to get about the same CAR but with a significant reduction in MDD.

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VIXY & SVXY Strategies

My recent research has been on the volatility Exchange Traded Products. My focus has been on long trades using VXX and XIV. Although VXX has a very strong downtrend, I am not a fan of developing short strategies on it due to the huge upside risk.  I wrote about XIV here and expressed some of the dangers of trading these ETFs.

UPDATE: These original results were published on October 26, 2016. Since then there have been lots of changes in the volatility ETFs/ETNs. Scroll down to Updated Results Through June 30, 2023 to see the updated results.

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