Daily Commentary - Posted on Saturday, February 6, 2010, 5:08 PM GMT +1

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Feb Saturday 6

Recovery Days and Short-Term Outlook

US major market indices fully complied to historical probabilities and odds when the VIX had surged 20%+ on a single session in the past: The SPY (S&P 500 ETF) showed the expected intraday weakness (follow-through of Thursday’s weakness), went up (to say the least) through the last hour of Friday’ session (see my respective Twitter update, now for the 17th out of the last 19th occurrences) and closed positive on the day.

But although such ‘recovery days‘ (posting an intraday low significantly below the previous session’s close early during the session, recouping all of those intraday losses and some into the end of the session) are regularly considered as an intermediate-term bottom and a buying opportunity, history tells otherwise.

Table I below shows the SPY‘ historical performance (since 01/01/1990) over the course of the then following five sessions after the SPY had posted an intraday low at least -1.75% below the previous sessions close (Friday’s low was -1.7475%), but closed positive on the day. 

(SPY data is adjusted for dividend and cash payments)

Interesting to note that the SPY closed lower on the then following session on 27 out of 42 occurrences since 1990 (on every 2 out of 3 occurrences), and posted at least one lower close than the trigger day’s close (Friday’s close) over the course of the then following five sessions on 38 out of those 42 occurrences for a probability of 90.48%, significantly above the at-any-time probability of 71.44% for at least one lower close over the course of the then following five sessions (those four occurrences where the SPY never looked back over the course of the next five sessions are marked with an asterisk).

In addition, especially those ‘recovery days‘ were – from a historical perspective – sessions which were – with an significantly above-average probability – followed by some of the worst performing sessions and clusters of sessions (over the course of the then following couple of days). With a historical next session’s Profit Factor of 0.38, a Distribution of Returns at 18.88% (the median trade shows a significantly lower rate of return / negative magnitude of change than the median trade (=50%) within the at-any-time distribution of daily returns; or the other way around: the setup’s median trade –  with -0.76% – is located in the lowest quartile of the at-any-time daily returns), and Top 10% Losers at 38.10% (means 38.10% of those 42 occurrences = 16 sessions are among the top 10% of the worst performing at-any-time sessions since 1990, significantly above the appropriate percentage of 10%), odds are lopsided in favor of a negative outcome on the then following (in this event Monday’s) session.

And even over the course of the then following five sessions, with a Distribution of Returns barely exceeding the 40.00% mark (the median trade shows a significantly lower rate of return / negative magnitude of change than the median trade (=50%) within the at-any-time distribution of returns), – at least with respect to this admittedly very specific setup – historical probabilites and odds do not support the thesis that the bottom is in (we might get a better opportunity during the next week).

Those ‘recovery days‘ frequently appeared during the bear markets in 2002 and 2008 / early 2009.

But as always: Everything is possible (but not probable) …

Successful trading,
Frank

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Disclaimer: No position in the securities mentioned in this post at time of writing.

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 (2)

 

  1. ETF FOOL says:

    […] Recovery days and short-term outlook (TradingTheOdds) […]

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