Daily Commentary - Posted on Tuesday, September 14, 2010, 11:36 AM GMT +1

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Sep Tuesday 14

7+ out of 8 at Month Start

On, Monday, September 13, the S&P 500 closed higher on the 7th out of the last 8 sessions, at the same time on 7 out of the first 8 sessions of the month.This remarkable strength right at the start of the month gives good resason to check for the market’s historical performance over the course of the then following x sessions (e.g. next day, remainder of the month), in order to figure out how this pattern played out in the past and if – and to which extend – any favorable edge on any side of the market is provided.

(If you’re interested in a short summary only, please click here)

Table I below shows the S&P 500‘s historical next session’s performance (since 1940, assumed one went long on close of the 8th session) on the 9th sessions (like on Tuesday, September 14) in the event the S&P 500 closed higher

  • Strat. #1 [7+ | 8 (1)] : on 7 out of the first 8 sessions of a month ,
  • Strat. #2 [7+ | 8 (2)] : on 7 out of the first 8 sessions of a month, with a higher close on day 8 (like on Monday, September 13) , and
  • Strat. #3 [7+ | 8 (3)] : on 7 out of any 8 consecutive sessions, except the first 8 sessions of a month .

Historically no edge is provided with respect to those occurrences when the S&P 500 closed higher on 7 out of any 8 consecutive sessions (excluding those sessions at the start of a month), although it is nevertheless remarkable that mean-reversion does not lead to an above-average probability (and negative odds) for a lower close on the 9th sessions.

But all the more remarkable is the fact that with respect to those occurrences right at the start of a month, probabilities and odds are (partly significantly) tilt in favor for a(nother) higher close on the next session (like on Tuesday, September 14), or at least over the course of the then following 2 (70.69% of the time) and 3 sessions (75.86% of the time, or on every 3 out of 4 occurrences). On 2 out of every 3 occurrences, the S&P 500 closed higher on the 9th session of the month as well (for 9 out of 10), and even on a lower close downside potential is regularly limited (out of 58 occurrences, the S&P 500 lost more than -1.00% on only 4 occurrences, and more than -1.25% only once).

Table II below shows the S&P 500‘s shows the S&P 500′s performance over the course of the then following x sessions, means the probabilitiy for at least one higher | lower close over the course of the then following x sessions, and the probability for a close above the trigger day’s close exactly x sessions later).

Last but not least Table III below lists all occurrences (Trigger Day is always the 8th sessions, like on Monday, September 13) and respective returns over the course of the then following 1 , 2 and 5 sessions, as well as the minimum number of sessions until the index posted a close above | below the trigger day’s close, when the S&P 500 closed higher on 7 out of the first 8 sessions of a month in the past.


( * = no close above the trigger day’s close during next 2 sessions )

Conclusions:

Out of 58 occurrences, the S&P 500 posted a close above the trigger day’s close (in this event on Monday, September 13) during the next 2 sessions on 41 occurrences (or 70.69% of the time), thereof on 38 occurrences on the 9th business day (one session later), on only 3 occurrences on the 10th business day (2 sessions later). Or the other way around: If the S&P 500 is not able to put in another higher close on the 9th session like on Tuesday, September 14, chances are low that it will do so on Wednesday, September 15 (weakness on today’s session might be indicative for Wednesday’s session as well).

After posting 7 higher closes during the first 8 sessions of a month, historical probabilities and odds are tilt in favor of a(nother) higher close on the 9th session (like on Tuesday, September 14), even when the one and only lower close (during the last 8 sessions) did not happen on the 8th day (then even at-any-time probabilities and odds would be slightly tilt in favor of a higher close). And even on a lower close downside potential on Tuesday session will probably be (very) limited.

Successful trading,

Frank

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Remarks: Due to their conceptual scope – and if not explicitely stated otherwise , all models/setups/strategies do not account for slippage, fees and transaction costs, do not account for return on cash and/or interest on margin, do not use position sizing (e.g. Kelly, optimal f) – they’re always ‘all in, do not use leverage (e.g. leveraged ETFs) but a marginable account is mandatory , do not utilize any kind of abnormal market filter (e.g. during market phases with extremely elevated volatility), do not use intraday buy/sell stops (end-of-day prices only), and models/setups/strategies are not ‘adaptive‘ (do not adjust to the ongoing changes in market conditions like bull and bear markets).

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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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(Data courtesy of MetaStock , and for data import, testing, surveys and statistics I use MATLAB from MathWorks)

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