Studies - Posted on Monday, November 30, 2009, 4:43 PM GMT +1

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Nov Monday 30

Investors Intelligence and the Market's intermediate-term Performance

On Wednesday, November 25, Investors Intelligence (Advisors’s Sentiment, an aggregation of the forecasts of more than 100 newsletter writers) reported the percentage of ‘bullish‘ newsletter writers at 50.6% and the percentage of ‘bearish‘ newsletter writers at 17.6%, the latter marking a multi-year low.

As JasonVan Bergen on Investopia argues (cit.): ‘The sentiment indicator assumes that a consensus trend is always about to reverse, providing traders with the opportunity to capitalize on an imminent reversal in price movement. The signs of a reversal are strongest when the balance of opinion is strongly skewed in one direction‘.

Therefore the Investor’s Intelligence Survey may not be very helpful most of the time when the percentage of bullish and bearish newsletter are reported rangebound at or around 45% bulls and 35% bears, but becomes much more interesting whenever the percentage of bullish and/or bearish newsletters comes in at at the extrem boundaries of their regular and historical range.

Table I shows the ES E-MINI S&P 500 performance over the course of the then following 20 sessions (regularly 1 month later) immediately following those sessions when the percentage of bearish newsletter writers had been reported below the 20% mark in the past (always assumed the data had been released on a Friday). Marked with a ‘+‘ are those occurrences where the ES E-MINI S&P 500 posted a higher close at least +3.0% above the trigger day’s close before it posted a close at least -3.0% below the trigger day’s close, and marked with a ‘‘ are those occurrences where the ES E-MINI S&P 500 posted a lower close at least -3.0% below the trigger day’s close before it posted a close at least +3.0% above the trigger day’s close (always in chronological order).

2009-11-28-ES-Sx

It is interesting to note that on 17 of those 44 occurrences the ES E-MINI S&P 500 posted a three percent loss on the close before it was able to post a three percent gain on the close (not on a single session, but below/above the trigger day’s close), while the ES E-MINI S&P 500 managed a three percent gain before a three percent loss on only 9 out of those 44 occurrences for a probability of 34.62%.

This observation is contradictory to the ES E-MINI S&P 500’s at-any-time probabilities for posting a three percent gain before posting a three percent loss above any trading day: Since 01/01/1990 the ES E-MINI S&P 500 posted a three percent gain before posting a three percent loss above any trading day on 1805 sessions, and a three percent loss before posting a three percent gain below any trading day on 1588 sessions, for a probability of 53.20%, significantly above the survey’s probability of 34.62%.

In addition, the ES E-MINI S&P 500 posted a four percent gain (on the close) above the trigger day’s close over the course of the then following 20 sessions on only 4 out of those 44 occurrences, and only once over the course of the then following 10 sessions.

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Bottom line:

At least based on historical probabilities and odds and the market’s regular performance over the course of the then following 20 sessions (regularly 1 month), the multi-year low with respect to the bearish newsletter writers may not be indicative that any kind of top is in, but at least the market shows a (significantly) above-average tendency for trading lower first before any (significant) gains may be achieved, and any year-end rally is not out of question, but may stand on shaky ground.

Successful trading,
Frank

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Summary of potentially tradable edges for Monday – November 30, 2009

DATE TIME WHAT ACTION WHY ENTRY
STOP 1)
Pos. Size 2) 3)
11/30/2009 ? E-MINI S&P 500
see setups above ? ?

1) the STOP may represent a buy or a sell stop ; on a long position a STOP above the ENTRY will represent a limit order (profit target achieved), a STOP below the ENTRY a stop loss order ; the inverse applies to a short position respectively
xx
2) For position sizing, optimal f (by Ralph Vince) is utilized;

optimal f = ([( win/loss ratio + 1 ) * probability of a winning trade ] – 1 ) / ( win/loss ratio ) ;
win/loss ratio = avg. gain on a winning trade / avg. loss on a losing trade ; /% simplified version ;
Pos. Size (in $) = MAX [Intraday / Overnight Initial Margin ; Maximum Losing Trade (in $) / optimal f ] ;

Margin requirements:
ES E-MINI S&P 500 (ES): Intraday Initial Margin = $2,250 ; Overnight Initial Margin = $5,625 ;
ES E-MINI Nasdaq 100 (NQ): Intraday Initial Margin = $1,750 ; Overnight Initial Margin = $3,500 ;
Russel 2000 Mini Futures (TF): Intraday Initial Margin = $2,500 ; Overnight Initial Margin = $5,000)
xx

3) Position size in units per $xxx of marginable equity; if the E-MINI S&P 500, the E-MINI NASDAQ 100 or Russel 2000 Mini Futures are utilized, the number in brackets equates to the number of contracts, otherwise to the number of leveraged Exchange-Traded Funds (ETFs) of 300% of the (inverse) performance of the underlying index, assumed a fixed marginable equity of $100,000

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Disclaimer: No position in the securities mentioned in this post at time of writing (but short volatility).

The information on this site is provided for statistical and informational purposes only. Nothing herein should be interpreted or regarded as personalized investment advice or to state or imply that past results are an indication of future performance. The author of this website is not a licensed financial advisor and will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on the content of this website(s). Under no circumstances does this information represent an advice or recommendation to buy, sell or hold any security.

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Comments (1)

 

  1. forex robot says:

    Keep posting stuff like this i really like it.

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