Peak Crashes: Are They a Shortable Opportunity?

AAPL 2008 exhausted3

In hindsight, it’s fun to look at stocks that have had a huge surge, only to collapse violently after they peak. And by “fun” I mean sitting on the sidelines watching, as opposed to pulling one’s hair out when you’re long that particular trade.

Above you can see Apple (AAPL) in 2008, where it hit its 52-week high, only to collapse a few days later, for a very significant loss.

Are these moments a shorting opportunity? I aim to find out.

So first, I’ll pick some somewhat arbitrary definitions of a ‘peak crash’ event.

• stock universe is the historical constituents of the Russell 3000 index.

• liquidity filter to eliminate the weird stuff: historical price >$10, with a median 19-day volume > 100,000 shares.

• The stock must have recently hit its 52-week highest close. I’ve defined this as the highest close of the last 10 trading days is equal to the highest close of the last 250 trading days. Which is close enough to being a year’s worth of trading days.

• The trigger is a drop of 8% or more from one close to the next, within that 10-day period of the highest close being reached.

• I then look at the forward gain/loss for the following 5, 10, 20 and 40 trading days.

• the period explored is 1/1/2000 through 12/22/2015. The end date represents the last ‘peak crash’ event that has the full 40 days of forward data to evaluate as of this writing.

Let’s take a look at the average gain or loss (expressed as a percentage) for each forward-looking period:

Screen Shot 2016-01-29 at 9.28.58 AM

Well now, that’s just boring as hell, isn’t it?

A slight mean-reversion tendency for the short term, and a slight downward continuation for the longer terms. The longer the holding period, the deeper the average loss, but I don’t know if these values are statistically significant.

Perhaps these peak-crashes are highly dependent on the overall market health to be a successful short? Let’s take a look at the yearly gain/loss averages for each forward looking period.

Screen Shot 2016-01-29 at 9.28.33 AMClearly there are some variations over the years!

The most striking takeaway from this chart is that if the year ends in “3”, go long. If the year ends in “1” or “8”, go short.

No, I’m kidding. That’s stupid. But what’s NOT stupid is taking a look at how the peak crashes behave under varying market conditions.

I’ve added another statistic to our data set: the percentage the S&P500 is below its highest close over the last year (ok, 250 trading days). So if the market is closing at a 250-day high, that percentage would be 0. From a code standpoint, I look at the peak-crash trigger, take the highest close of the S&P500 over the last 250 days, and divide it by the current close of the S&P 500. As of the close of 01/28/16, the S&P 500 is 12.9% under its 250-day closing high. Make sense?

This is a simple way to show if the market is doing well or not. There are of course other ways, such as my breadth diffusion indicator discussed a while back. But I wanted to keep this simple.

Here is a chart of all the peak-crash events, sorted by the S&P-percent-under-250-day-highest-close value. Then divided up into vigintiles. I’ve put the the ranges of some select vigintiles so you can get a sense of the values they encompass.

Screen Shot 2016-01-29 at 9.28.22 AMYou’ll note that there are many more instances where these peak-crash events happen and the market is very close to its 250-day closing high. In fact, about half of nearly 10,000 events occur when the market is 0-3.5% below the 250-day highest close.

From a shorting standpoint, the action doesn’t really start happening until the market is about 5.9% below its yearly closing high. And while the shorter periods show a pesky tendency to bounce back after such a drop over most market conditions, the 40-day forward period looks promising. Let’s look at that more closely.

Screen Shot 2016-01-29 at 9.28.10 AM

There might be a shorting system here. When the market is 6% down or more, these peak-crashes on average end up in a further two-month (40 day) loss. I’ll leave that to the reader to actually refine into a workable system.

And when markets are booming—remember those days?—perhaps a good shorting system might be found in the 10-day forward period (see below). The average loss when the market is less than 2.9% below the 250-day highest close is much smaller, but it’s pretty consistent. This might be worth checking out for when times are good again.

Screen Shot 2016-01-29 at 10.03.54 AM

And because charts can be a little boring, here’s a mountain sunset photo, taken on my phone.

Sunset at Green Valley Lake

3 thoughts on “Peak Crashes: Are They a Shortable Opportunity?”

  1. Looking at the results, perhaps an even better opportunity would be to wait ~ 10 days for that initial bounce and then go short? Just a thought.. as always, great research and insights.

    1. Hi Brian. That’s a good idea. Perhaps waiting for a ‘dead cat bounce’ and then shorting on that rally instead. I haven’t coded this into an actual trading system to backtest yet, but I’ll have a look at that possibility as well. Thanks!

      P.S. stay tuned for another bit of shorting research tomorrow. 🙂

      1. I was also thinking of this dead cat bounce thingy when looking at your charts.

        So how a backtest would look like if one waits 5 days after the trigger and hold short position for another 5 days?

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