Qs weekly data update

This is an update of the Qs end of quarter weekly performance report begun last week. I've expanded the study field to include 15 years of data (as compared to the original 5 years of data) although both studies are shown.
A couple things to consider here:
Back in 1992 the Qs were $ 7.60 (who said buy and hold didn't work?), so a .28 decline meant a lot more than the current situation, where the price is 7 times higher.
On the other hand, the declines in 2000 look breathtaking until you consider than the Qs were trading for $84 on that Oct 1st.
(1993 -$9, 1994 -$10, 1995 -$14.60, 1996 -$18.65, 1997 -$28, 1998 -$32, 1999 -$60, 2000 -$84, 2001 -$29, 2002-$21, etc . . . )
Regardless of which data set we consider, the developing data field for this year is unique in the outright strength of the Qs. Whether 2007 will be a redux of 1999 remains to be seen, but recent trading has shown that the majority of pullbacks have been treated as buying opportunities and until that pattern reverses I regard the Qs as the most attractive of the major indicies.

Markets surges

Well, that was a surprise. Qs now at a new high on moderately increasing volume. Although some traders were inclined to fade today's gap Open, the fact that pre-market volume in the Qs was over 10M (as opposed to the usual 2-3M) strongly suggested that today's action might not be a pop and drop scenario. Trend followers made out like bandits today; SAR (stop and reverse) traders like myself got left behind as the rise showed diverse and pervasive strength. I got in a few early trades today (NDAQ, WYE and EK), and closed the positions in the last hour prior to the long weekend.

Yesterday I expressed the view that the Qs looked ready to reverse down based on technical signals. That obviously wasn't the case (one of the profound weaknesses of technical analysis) which I surmised as soon as I watched the huge Qs volume gap at the open. The trick to surviving when such things happen is to be willing to adapt to what the market gives you when you are expecting something entirely different, and while this sounds like an easy thing to do . . . it's not.
The current VIX bands look weird, to say the least. The VIX did retreat below the 10DSMA without hitting my 16DSMA target on this cycle, but technical analysis is a study of probabilities, not certainties. I don't trade VIX options, but use the VIX as a derivative indicator because of it's high negative correlation with the Qs. It was certainly unambiguous today.

This month's Future's

I've mentioned FUTURES magazine before, and I think this month's edition is one of the best. You can get a flavor by linking to http://www.futuresmag.com/, which provides synopses of the articles as well as other traders tools. Although called Futures, the articles cover the full spectrum of trading instruments and feature very practical trading strategies. Imho, one of the best articles this month is a piece by Richard Muehlberg on Using Trend Dynamics for Day-Trading Profits, a concise and insightful look into the power of linear regression for analyzing short term trades. Since I'm a big fan of LR this piece really hit home with me because he uses it in a way that I had not previously considered. Richard also keeps a trading diary at http://www.daytradingwithlinesinthesky.com/ (sounds like an old Beatles tune) that's definitely worth a look.

Playing the waiting game

The Qs closed up .02 today after a narrow range, low volume day. The 7/3 DSMAs are about to cross over, having broken off the upper Keltner channel and although the RSI is giving no clue, the overbought MACD is turning down and suggests further weakness to come. Our October weekly Qs performance study projects next week as likely weak, which aligns with the Trader's Almanac 20 year statistics. That being said, earnings season is beginning and the usual gamut of cleverly timed govt. reports can take the markets either way, so I'm expecting volatility to increase and just playing delta neutral tactics for now.

The VIX performed strangely today. . . trending down along with the NYAD and the TICK from 10:45 to 11:45 pst. That's not typical. Watching volatility action on the pivot lines was like watching a worm crawl a string line. The NYAD went limp about 11:45 and the TICK had one of the narrowest ranges seen in recent memory, reflecting traders unwillingness to make any large commitments.

VIX rises towards 16DSMA target

The Qs got a minor retracement today on increased volume, but they really had to work on taking it down to S2 at the close. With the MACD at 1.25, the histogram below the zero line and the RSI now heading down, we may see more weakness tomorrow. The lack of volume into the closing 15 minutes was rather atypical and I'm not sure of the significant. However, the NYAD and the TICK were upslope for the last 1/2 hour and that generally bodes well for the bulls.

The VIX looked like it might hit my 4 day target of the 16DSMA, but failed to get very far and closed with a doji still above the 10 DSMA. The current VIX movement has now fallen into the "other 18% " category although based on current MACD readings I still expect to see it cross the 16DSMA in this cycle before starting down again.

Qs First & Second Day of Month Returns

Here are the results of my continuing exploration of Qs behavior. . . in this case how the Qs perform on the first and second days of a new month. Looking back over 33 months of data we see the Qs average a gain of .12 the first day and .13 the second day, or $.25 for the first 2 days. This works out to an ROI of .06% for a 4 day holding period . . not exactly a stellar return. Obviously this is a work in progress and we need to improve on the probable ROI payout before initiating any positions based on this strategy.
Additional data that was analyzed, but not included in this spreadsheet includes the value of the Last Day Close-First Day Open (average +.05). Taking the residual from the FDC .12-.05= .07, and adding to the 2nd Day Close of .13 = .20 average for a 2 day carry period. One strategy suggested by this data is the purchase of ITM or deep ITM Q calls at the FDC open with the goal of flipping them at the 2nd Day Close. This would push our leverage to approx 10:1, reduce our exposure (only 2 days holding) and premium decay should be minimal as the weekend cusp had passed. More thoughts on this tactic later as well as several entry filters that may improve the ROI.
As always, reader comments are welcome.

Of interest

I hate to be a shil for CXO (again), and I have no idea how they keep finding these great academic research papers, BUT here's one of particular interest to me and to any trader who use a variety option strategies to either hedge or augment their portfolio returns.
Net conclusion: sell the puts.

Qs continue (kinda); VIX hits 10DSMA

Oil and gold got slammed today, but the Qs held together nicely after a modest low volume early retreat. The entire market seemed to be in a fog mid morning, with volume dribbling along and no real momo to one side or the other. As I have mentioned previously, just because the Qs are clearly overbought at this point doesn't mean they can't continue to get more overbought.

I'm still sticking with my game plan outlined this weekend and am looking for short term weakness to creep in by next week.

The VIX did make it to the 10 DMSA as the major indices declined, although the Qs failed to participate. As the VIX MACD has turned up and the histogram is above the zero line I suspect the VIX will continue to rise with the 16 day MA the next target. My VIX retracement study of last week predicted an 82% probability of hitting that target in 4 days after the bounce off the lower band. Today's action counts as day 3 so I'm curious to see how tomorrow plays out.

More on End of Quarter & End of Month Performance

While trolling the blogsphere I happened across a recent post from CXO dealing with end of quarter and end of month S&P performance. CXO obviously has a lot more time and resources than I do to pursue these statistical explorations and my weekend studies were merely data snapshots, however the turn of month statistics are impressive and deserve a look. I'm currently running some similar studies on the Qs and will share the results when available.

First day of month pops

The first trading day of the new month opened with a roar and the buying was aggressive and across the board. While I am skeptical of Citicorp's enthusiatic endorsement of the housing stocks as "value" plays and suspect the financial whirlwinds are not completely played out yet, there were some excellent buy candidates today, mainly on the fringes of the tech sector.

The Q's performance contributed to the party and I took the results of my weekend research posts to load up on a number of issues early on, rode them up and then sold ATM near term calls to protect the positions. Keeping in mind my risk adverse nature and the implication from the Qs weekly study (posted Sunday) that the Qs will pullback prior to expiration October 19th, I hedged my new Q buys by selling near 52 calls, which I may buy back back if the Qs fade in the near term.

The VIX basically went nowhere today, which is an interesting development in itself. The VIX almost made it back to the 10 DSMA . . a situation that may be resolved as early as tomorrow since the MACD histogram is at the zero line and the MA component is turning up.

Qs 3rd Quarter Weekly Data

My Qs end of quarter (EOQ) study concludes with this snapshot of weekly performance for 2002-2006. The data field is limited to only 5 years so I am reluctant to bet the farm on the results, but certain patterns do pop out here:
1. The week before EOQ3 has been consistently negative 02-06.
This year is different.
2. The week of the EOQ3 has been close to the zero line 02-06.
This year is different.
3. The week following EOQ3 has been solidly up 4 out of the last 5 years.
4. The 2nd week following EOQ3 has been solidly down 3 out of the last 5 years.
5. The 4th week following EOQ3 has been up 5 out of the last 5 years, perhaps benefiting from October/November cusp buying.

The 2007 data shows impressive strength in the Qs relative to the past 5 years and the historical data suggests that strength is likely to continue through October.
All this sounds great but past performance is no guarantee of future success so caution is ALWAYS advised.

More on Deconstructing the Qs

This chart is a continuation of the study begun today. My goal was to look at how select ETFs perform 1 month after each quarter and to discern if there were any seasonal patterns revealed that might provide a trading edge. The initial study posted this morning suggested that October might be a good time to get bullish on the Qs and I wondered if the same pattern was reflected in the DIA and the IWM. Based on the above results, the Qs clearly stand out as the best bet, with the IWMs taking second place and the DOW showing good results, but not outstanding. One must also consider the the relative value of each of these instruments: a $9 gain in the $50 Qs reflects a much higher ROI than a $10 gain in the $138 DIAs.
Next I want to look at a breakdown of weekly performance after the quarter to determine if there is a surge pattern. I hope to present those results on Sunday in order to identify possible entry points.

Deconstructing the Qs

A piece by Bespoke on S&P behavior at quarter's end got me thinking. . . so I ran a somewhat similar study for the Qs. I've highlighted third quarter results just because that's where the action currently resides. I've also modified the study a little bit from the Bespoke version: whereas they looked at performance results over the entire next quarter, I'm kind of a short term guy and only looked at performance over the following month.

The results are quite stunning and support a high probability gain in the Qs for the coming month. The study also has important implications for those that prefer to hedge their bets with buy/writes as the OTM calls with maximum premium decay and minimal downside risk become more attractive. The study also suggests a strangle strategy selling puts and calls with the puts slightly below the current strike and the calls considerably OTM.
I haven't had a chance to look at the relative costs of simply buying ATM calls out 2 months. . . that will also be a topic for further investigation.

Over the next few days, as time permits, I'll be running similar analyses of post quarter performance for the DIA and IWM.

A modest backstep

The markets failed to follow through today, as was widely anticipated. We need to see a reversal, or at least a consolidation of recent September gains before blasting off in to the traditional power months of October-January. Also as expected, the Qs showed considerable resilience relative to the other indexes, especially into the close, and although the volume was about the same as yesterday, selldowns were treated as buying opportunities. Cucca does a great job of showing the trap door setup in the Qs this morning, and that was a classic example. I suspect this weakness may follow through on Monday but am also expecting a resumption of the uptrend fairly quickly. Tomorrow I'll post a little study of Qs behavior around the end of the quarter that may help put things in perspective.

The VIX finally got a nudge off the lower band with an initial target of the 10 DSMA which we may see on Monday. Based on the VIX study I cited yesterday, once the VIX departs from an 18% variance we can expect it to hit the 16 DMSA within 4 days 82% of the time. That would return us to a VIX reading of 21, approximately in the middle of the bands and set up for another run down.

Strange goings-on down under

Dr.Brett is off to the land of kangaroos, dingos, great whites, Mad Max, Steve Irwin and other cool stuff to help our Aussie brethren in their quest for trading success. There certainty can be no better ambassador for the cause and I enthusiastically support his efforts to share the wealth of information and inspiration which he so uniquely offers.
I have often wondered what cultural differences mark the Australians and in an effort to educate me an alert reader has brought the following news item from Brisbane to my attention:

Thief rips off woman's underpants in public
By Robyn Ironside and Ursula Heger
September 26, 2007 01:00am
Article from: news.au.com

DETECTIVES are baffled by a brazen daylight attack at Newmarket, in Brisbane's inner north on Monday, in which a woman had her underpants ripped off and bag stolen.
"It's pretty strange. I haven't heard anything like it before," Det-Sen-Sgt Brad Rix said.
He said the 23-year-old was grabbed from behind as she walked home from Newmarket train station about 4.30pm (AEST).
The offender then lifted her dress up, and pulled off her underpants before grabbing her bag and taking off.
"It was absolute daylight, not far from a train station. This person must have felt sure he was going to get away with it," Det-Sen-Sgt Rix said. He said there was no attempt to sexually assault the woman, who did not realise her bag had been stolen until some time later.
"It's possible he may have stolen her underpants as a trophy, or perhaps he intended taking the attack further. We don't know," he said.

I can only imagine the underpants scene from Zoolander.

Overdue for a hiccup

Today's action looked an awful lot like yesterday. The activity was a bit more subdued and the volume somewhat restrained, but both the TICK and the NYAD actually looked more bullish today than yesterday. For the last 5 hours of the day the VIX, NYAD and TICK were in sync. The financials (XLF) look like they might be getting some legs, but the gaming in these stocks is nothing short of notorious, so I have little interest in the sector for now.

I'm continuing to hold on any new positions. Although the last and first trading days of the month are typically bullish, fourth quarter portfolio realignment by the funds may create some selling pressure and I waiting to see how that plays out. I'm also devoting a considerable amount of time to various performance studies, one on the VIX and several on the Qs, not surprisingly.

The VIX is REALLY getting overdue for a turn. Just to prove it to myself I ran a little TradeStation study (optimizied) and found that over the past 64 months, the VIX has crossed 18% below the 12 day moving average 136 times. If you had bought each of those crosses and held till the VIX crossed over the 16 day moving average (average holding time 4 days), you would have been profitable 82% of the time. I think those are pretty good odds.

TS2000i code as follows:

Inputs: Pcntile(.18), Len2(12), Len3(16);

If Currentbar > 1 and Close Crosses Below Percentile(Pcntile,C,Len2)

Then Buy Next Bar at Market;

If Currentbar > 1 and Close Crosses Above Average(Close,Len3)

Then Exitlong This Bar at Close;

I'm sure you smart programmers out there can improve on this simple system by adding stops and/or conditional clauses.

Tech stocks get giddy

Just remember gentle readers. . .you read it here first!. Apparently the Wall Street Journal was so inspired by my comments about the Qs that they wrote a feature article about it. Unfortunately, the WSJ site is subscription based, but if you have an account, read away.

They Qs gapped up at the Open, made another new high and settled down slightly on the upper Keltner channel band to close with a doji. I've pulled back a bit on the chart scale to show the current indicator signals. Typically, the Qs would fade at this overbought level (RSI3>90 and MACD>1) although the pattern of mid-July shows the overbought condition can prevail for some time as price hugs the upper band. The Qs have been on a steady incremental rise since Sept.7th with fairly consistent daily volume as opposed to the volume roller coaster of July and August. Based on current momentum I don't think we'll see a dramatic retracement here, but a pullback is overdue. However, as long as EOD bars continue to stay above the 8 DSMA (plot the low, not the close), the Qs will continue to climb.

The VIX continues to hug the lower bollinger band while maintaining their distance from the 10 and 20 DSMAs. VIX and More also notes this disparity and adds some historical meat to the stew. As with the Qs, the VIX is flashing extreme signals. . .in this case . . .oversold readings . . . the MACD histogram is creeping towards the zero line with the MACD itself registering an whooping -2.5.

More of the same

The Qs continue to show strength while the rest of the market wallows in worry and is in fact up .07 after hours on solid volume. That's probably due to at least 2 factors:

1) The Qs have no financial (except net banking), home building or retail merchandising exposure.

2) Microsoft has been on a run up the past two days (Halo 3 and ????)

While supporting the NASDAQ, MSFT's 75M share .48 gain also helped the ailing DOW stay above the zero line. Other than BA, HPQ, HON and UTX the DOW was not showing much enthusiasm today.

Although the Qs are now solidly overbought, that doesn't mean they are going down any time soon. Just look at the July chart reading. We haven't even touched the upper band yet and from a strictly risk management point of view, what are the options for the mutual funds that have to be fully invested and the hedge funds who don't want to be short because of the impending (maybe) Fall market surge. The Beta is with the NAZ and the Qs are the ETF of choice. Expect volume to pick up in the coming weeks as the field gets crowded.

The VIX had a 9% range and flashed a solid red bar into the close. This may be the precursor for the reversal as the VIX is solidly oversold. When we do get the turn I expect the IWM and SPY to give up the most ground and the Qs the least.

The portfolio remain 80% net long and I'm still on hold for Thursday before initiating any new positions.

When math skills fail

My wife and I always enjoy the Del Mar racetrack and we generally manage to at least break even based on a betting system my wife has developed that places little emphasis on the horses and great emphasis on the jockeys. I have learned that being clever with your betting seldom pans out, so I focus on the 30 to 1 long shots and bet them across the board. I typically hit at least one of these on each visit to the track and that's how I make my nut.

Here's an amusing little item from the Sports Column Blog about a guy in Rochester, NY (my hometown) on how not to bet the Kentucky Derby.

We love betting the trifecta. For a buck or two, you can win hundreds if not thousands of dollars on a race. Hell, sometimes we'll even go crazy and go with the trifecta box. However, we also know enough about statistics to know that you can't bet every single permutation in a race and expect to come out on top. But that's exactly what a man in Rochester, NY did. On the day of the Kentucky Derby, a man walked into an OTB and asked how much it would cost to buy every possible trifecta combination. And now we break for a quick math lesson-- If you have 20 horses in the field, the possible outcomes for the first three horses would be 20! / (20-3)! = 6,840. Likewise, a superfecta (first 4 horses) would be 116,280. And now back to your regularly scheduled programming-- The man was told the answer and came back to place the wagers. It cost him a total of $13,680 for his $2 trifectas and he wound up winning... wait for it... wait for it... $440. If you're gonna make a bet like this, you better know what you're getting yourself into. And since the payout odds are terrible on favorites, you should just eliminate those trifecta combinations. But alas, the man had more cash than math skills so now he's $13,240 poorer for his trouble.

Carbon Copy

Today's Qs and VIX performance were pretty much mirror images of Friday in reverse. The Qs continue to look overbought and the VIX looks oversold as it continues to hug the declining(and expanding lower band. Some strange behavior on the VIX today at 11:20 when we got a .50 gap down in 2 minutes, with just little blip in the TICK and no impact on the NYAD.
I continue to track order flow on the NYSE per my Sept 1-6 posts and note that the FICAPs have assumed a 4% larger presence in the markets over the past 2 weeks, although I'm not going to try and explain why.
A likely emerging scenario might include the VIX popping off the lower band and heading back to the 10 & 20 DSMAs in the next few days, with the markets showing some weakness and consolidation. This scneario would provide a jumping off point for an end of month rally that would carry through DOW 14,000 and Qs 52.
Althought these reversals are typically resaged by wide range bars, this market has shown itself time and time again not to be "typical", and the muliple dojis and hammers currently on display may be the tell for the next turn.
Meanwhile, I'm cautiously waiting until Thursday before getting frisky.