Double Gaps and Hens’ Teeth

I looked at the chart for SPY just now, and thought, “Huh…two days in a row that have gapped up. Wonder if that’s significant in any way?” By “gap,” I mean that today’s low was higher than yesterday’s high.

When this happens two days in a row, does it mean we should use quintuple leverage to buy everything we can? Sell at the opening bell and hide under a rock? Something else?

Turns out, this double-gap stuff is as rare as hens’ teeth. Since 2000, it has only happened eight times (including today). Therefore, NO CONCLUSIONS CAN BE MADE! There isn’t enough data to glean anything useful. But in case you were wondering, here’s how it would look if you bought at tomorrow’s open (“O1”), and held to tomorrow’s close (“C1”), the following day’s close (“C2”), or until five days later (“C6”). Again, nothing useful other than to ponder why this might be so rare.

 

Ticker Date/Time  O1 to C1  C1 to C2  C1 to C6 
SPY    10/4/2004  0.04      0.68     -1.16
SPY    12/24/2007 0.61     -0.66     -2.55
SPY    9/7/2012  -0.47     -0.19      1.77
SPY    12/9/2013 -0.13     -1.25     -1.29
SPY    2/17/2016 -0.57     -0.62      1.21
SPY    7/11/2016  0.20      0.18      0.77
SPY    9/12/2017  0.18      0.15      0.14
SPY    7/10/2018  ???       ???       ???

 

Open Up!

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!

Synthetic VXX/XIV Data

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.

“These Aren’t The Gains You’re Looking For” (Leveraged ETFs)

“These aren’t the droids you’re looking for.” (Flickr/donsolo, CC BY-NC-SA)

Ah…leveraged ETFs. All that beta without all the embarrassment of trying to borrow money from your broker (or cousin) to leverage your returns. Is the regular ETF not volatile enough for you? Buy the 2x version! Still too tepid? Perhaps the 3x version is what you’re looking for.

Unless you’re new to trading though, you’ve probably heard about beta slippage. This is where leveraged ETFs, using a combination of volatility and pesky math, end up losing as compared to their 1x versions over the long haul. Leveraged ETFs aim to provide a 2x or 3x return on an intraday basis as compared to a 1x version (or the index they’re tracking). But, over time, these leveraged returns decay.

For example, let’s take a look at two gold miner ETFs, which track an index of gold miner stocks. We have the plain vanilla version, GDX, and then a triple-leveraged version, NUGT. These are managed by two different investment funds, so we’d expect there to be some day to day discrepancies. Starting at the beginning of 2011, here are the results of a buy and hold approach to each:

Continue reading “These Aren’t The Gains You’re Looking For” (Leveraged ETFs)