On February 17th, we got a signal from Matt’s Breadth Indicator (aka “The 30% Up/Down in a Quarter Diffusion Index”…can you see why I just called it after myself?) to get the heck out of the market. Or at least to put on our Danger Spectacles and tighten your Volatility Helmets. You would be excused a week later for asking what the problem was. The problem of course manifested itself shortly thereafter. We are now into a second period of closing below our initial “get out!” period.
See? The indicator told you so. Even when the S&P 500 seemed to be saying otherwise.
Does this mean the markets are going to drop to the ground like some bunker-busting price-bomb? Er…I dunno. It’s just an indicator, not a prognosticator!
This is kind of a weird one.
I was mulling over the question of what happens when the market opens up, i.e. above its previous close. Is the day likely to be an up day? A down day? I got out my data and started poking around. I looked at all “open-up” days with an open at least 0.25% above the previous day’s close. I looked at only days that opened up after a previous close-to-close down day. And the reverse.
The statistics were not significant, although it appeared there was something of a shorting opportunity there. I therefore put together a backtest for shorting at the open and holding to the close, and that looked like utter garbage. Continue reading Open Up!
Anyone who trades VXX or XIV ETFs knows that their history is unfortunately too short. They track the VIX futures, but only go back to 2009. How would they have performed during the Kerfluffle of 2008?
A number of people have come up with ways to use the futures data from prior to the ETFs’ inception, and create synthetic data to use in testing. Many charge for this data.
A friend pointed me to a website that has the data for free. With a little know-how, you can create a synthetic version of VXX and XIV and import into your favorite backtesting software. It seems to track very nicely too.
In the above graph, the red line is actual traded XIV, and the blue is the synthetic version going all the way back to 2004. Looks close enough to me! The tail end is a prediction that the creator cooked up, which you should ignore for testing purposes.
I am relieved to find that my medium-term XIV system would have been out of the market for most of 2008. Very reassuring.
If you were looking for synthetic VXX/XIV data, head on over here.
Read also: What I Trade.
There are two systems I’ve been trading since the beginning of 2016. That’s fifteen months of true out-of-sample, real live experience. I’m pleased to report the results have been very good, and consistent with their original backtests.
Continue reading What I Trade
In the last post (here), I examined what happened after a stock moved down a significant multiple of its previous day’s Average True Range (ATR20 in this case). Stocks tended to have up days on day 1 and days 3-5, with a down day on day 2 as an average. What about bursts upward? Are they the opposite? Would they make a good shorting opportunity?
Continue reading Pop or Drop part 2: Big Moves Upward