Daily Commentary - Posted on Saturday, October 2, 2010, 7:49 PM GMT +1

4 Comments


Oct Saturday 2

As September goes, so goes …

… probably the first week of October (upper part of the posting) and the remainder of the year (lower part of the posting) as well.

Wayne Whaley, CTA of Witter & Lester Inc. and 2010 Charles H. Dow Award winner, and Rennie Young from MarketTells (highly recommended) – hats off to both – presented a very interesting and telling study concerning the positive short-term (1-week time frame) implications in the event the S&P 500 wrote better than a 7.5% monthly gain in the past.

While Wayne Whaley showed the last 11 and Rennie Young all occurrences since 1950, I extended the time frame back to 1930 and did not only look at the level where the S&P 500 was trading exactly 5 sessions (or 1 week) later, but examined the days in between as well.

Table I below shows the S&P 500’s historical performance (since 01/01/1930) over the course of the then following 1 , 2 , 3 , 4 , and 5 sessions in the event the S&P 500 was up better than 7.5% month-to-date on close of the final session of the month.


(* no close below trigger day’s close during next 5 sessions)

Out of 53 occurrences, the S&P 500 closed higher (above the close on the last session of September) the next day (in this event on Monday, October 1, which already was an up-day for the S&P 500) on 29 occurrences (or 54.72% of the time), 2 days later on 32 occurrences (or 60.38% of the time), 3 days later on 41 occurrences (or 77.36% of the time) – and on only 1 out of the last 30 occurrences lower more than -1.0% – , 4 days later on 41 occurrences (or 77.36% of the time) – thereof on all of the last 11 occurrences – , and 5 sessions later on 40 occurrences (or 75.47% of the time) – thereof on 12 out of the last 13 occurrences – , significantly better than the S&P 500’s at-any-time (random) chance of 55.23% for closing higher 1 week later.

In addition: Out of those 53 occurrences, the S&P 500 never looked back and did not post a single  close below the trigger day’s close (the month-end close) during the next 5 sessions on 20 occurrences (or 37.75% of the time), better than the at-any-time (random) chance of 29.71% for not posting a close below the trigger day’s close over the course of the then following 5 sessions.

And historically downside potential was limited as well: The S&P 500 was trading lower -1.0% or more 5 sessions (1 week) later on only 7 out of those 53 occurrences (or 13.21% of the time), in comparison to the S&P 500’s at-any-time chance of 26.64% for trading lower -1.0% or more at the end of the then following week.

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But in order to check for the intermediate- and long-term implications of such extraordinary monthly gains as well, and due to the fact that up to now there were only 2 other occurrences since 1930 (1939 and 1954) where the S&P 500 closed out the month with better than a 7.5% gain in September, I examinded those occurrences where the S&P 500 was up year-to-date at the end of September vs. those occurrences where it was down year-to-date (the S&P 500 was up 2.34% year-to-date at the end of September 2010).

Table II below shows the S&P 500’s historical probability (since 01/01/1930) of posting at least 1 higher | lower close over the course of the then following 1 up to 63 sessions (approxim. 3 month), and trading (closing) higher exactly x sessions later in the event the S&P 500 was up year-to-date at the end of September (‘up YtD‘) and down year-to-date (‘down YtD‘).

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Interestingly, the ‘S&P 500 up year-to-date at the end of September‘ setup not only outperforms the ‘S&P 500 down year-to-date at the end of September‘ setup on every single day over the course of the then following 3 month (means it’s probability for posting a higher close exactly x sessions later always outnumbers its respective counterpart’s probability for posting a higher close exactly x sessions later), the S&P 500’s year-to-date performance at the end of September seems to be highly indicative for the S&P 500’s performance over the remainder of the year as well.

In the event the S&P 500 was up year-to-date at the end of September, the S&P 500 closed at a higher level 63 sessions (approx. 3 month) later (year-end) on 40 out of 49 occurrences (or 81.63% of the time), while being down year-to-date at the end of September the index closed at a higher level 63 sessions (approx. 3 month) later on only 15 out of 29 occurrences (or 51.72% of the time), the former significantly higher and the latter significantly lower than the respective at-any-time probability of 61.01% for posting a higher close exactly 63 sessions later.

Table III below now shows the S&P 500’s historical performance (since 01/01/1930) over the course of the then following 5 (1 week) , 21 (approx. 1 month), 42 (approx. 2 month) and 63 (approx. 3 month) sessions in the event the S&P 500 was up year-to-date at the end of September.


(* no close below trigger day’s close during next 3 month)

The S&P 500 was trading higher 2 month later on 12 out of the last 13 occurrences, and 3 month later on 15 out of the last 16 occurrences. And on 44 out of 49 occurrences, the S&P 500 posted a close above September’s close at least once at the end (the last session) of October, November or December. In addition: Out of those 49 occurrences, the S&P 500 never looked back and did not post a single  close below the trigger day’s close (in this event September’s month-end close) over the course of the then following 3 month on 9 occurrences (or 18.37% of the time), (significantly) better than the at-any-time (random) chance of 9.23% for not posting a close below the trigger day’s close over the course of the then following 3 month.

Table IV below now shows the S&P 500’s historical performance (since 01/01/1930) over the course of the then following 5 (1 week) , 21 (approx. 1 month), 42 (approx. 2 month) and 63 (approx. 3 month) sessions in the event the S&P 500 was down year-to-date at the end of September.


(* no close below trigger day’s close during next 3 month)

Already being down year-to-date at the end of September, the S&P 500 lost an additional -10.0% or more during the then following 3 month on 7 out of those 29 occurrences (or on 1 out of every 4 sessions). Good to know that we currently missed being down for the year at the end of September, even if it was by a hairbreadth only (up 2.34%).

Conclusions:

Historically, everything seems to be in place for (means probabilities and odds are significantly tilt in favor of) a year-end rally. The fact that in September the S&P 500 wrote better than a 7.5% handsome monthly gain, and the S&P 500 being up year-to-date on the end of September are (highly) indicative for a continuation of the recent run-up in the markets, and historically downside potential was regularly limited over the remainder of the year (except 1943, 1978 and especially 1987).

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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Disclaimer

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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Comments (4)

 

  1. […] This post was mentioned on Twitter by Frank Hogelucht, Anthony Wes. Anthony Wes said: As September goes, so goes … | TRADING THE ODDS: Table I below shows the S&P 500′s historical performance (since 0… http://bit.ly/9ld3ef […]

  2. trip nixon says:

    The problem with this analysis is that you ignored one fact about the cases where significant losses occurred — they were all in bear markets. We are slipping into a bear market by definition because financials are already in a bear market, so the S&P will follow. Financials are the leadership sector since 2007.

    Expecting a crash in October. Many financial companies will not only be slammed by weak earnings in the coming weeks, but they will also be investigated and probably sued by the government or individuals over fraudulent foreclosure practices.

    The market is complacent. They don’t even know what’s about to happen.

    • TradingTheOdds says:

      trip nixon,

      thanks a lot, but I don’t agree, and I did not ignore anything.

      The S&P 500 being up or down year-to-date at the end of September (and what then happened for the remainder of the year in the past) is simply a matter of fact (without any bias or assumption about future events), independently from the then current trend of the market, and independently from one’s definition of ‘bear markets’ (leave alone your assumption of weak earnings and fraudulent foreclosure practices).

      Best,
      Frank

  3. tag says:

    i find your stats interesting. what is more interesting is there is always a 95%+ bias to the long/bullish side, (talk about greedy morons!) so i dont understand all the whining and pumping by bullish traders on downside cycles. i mean really,, they get to use 4-1 or 20-1 margin to buy stocks, stocks that have very little in revenues or ones that get p&d in the media or net.

    it takes no skill to be a bull
    it takes skill to trade
    it takes skill and guts to be a short/bear

    and the funny thing is only a bear will run the math models.

    pump and dump is alive and well and has been since day 1 of the stock market opening.

    the government tried to limit ‘short sellers’ what they found was all of the bulls were IN the stocks,, who is left to squeeze if the entire stock is owned by wallstreet or any other set of bulls?

    suppose we made laws that said bulls cant use margin and they had to hold their stocks for a week/month/6months? or if wallstreet were required to hold any upgraded stock for a period of 6 months?

    i see stocks out there that are owned by wallstreet into the 100%’s of percent, the short factor has to be ignored because that is just wallstreet pumping to each other. and the stocks are selling for HUGE multiples of revenues.. why is that important?

    well would you pay $30 for a koolaide stand that makes $1? prolly not,, but that is the biz math that is and has been taught since the 1960’s is it no wonder america lost so many jobs???? we are a society of morons for lowering our standards for decades.

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