Friday, March 10, 2006

Does The Market Trend on an Intraday Basis?

I'm getting quite a few positive comments on my recent Trading Markets article that documents the decline in trending behavior in the S&P 500 Index over the past 40 years. What has been eye-opening, however, is that this loss of trendiness has occurred across all time frames that I've investigated thus far.

Here's an example. I took hourly readings of SPY since December 13, 2005 (N = 478). I once again looked for all occasions in which a rise was followed by a rise and a decline by a decline. If the odds of a rise or decline are 50/50, we should see half of all occasions by chance result in either two consecutive rises or two consecutive declines.

In fact, we see 225 occasions where either a rise was followed by a rise or a decline followed by a decline and 253 occasions where rises were followed by declines or declines by rises. During March alone (N = 64), we've seen 28 occasions where rises were followed by rises or declines by declines and 36 occasions where there was no continuation of a move.

Once again, we not only see an absence of trending--failure of rises to be followed by rises and declines by declines--but actually evidence of antipersistence. On average, rises are being followed by declines and vice versa. This is wreaking havoc with momentum traders in the ES and SPY markets.

Next I'll look at other indices and sectors and see where there might be opportunity for trend and momentum traders.

9 comments:

Steve Haughey said...

Brett

I think you'll find that whipsawing, or anti-auto-correlation as I like to call it after a few drinks, was also pretty common in the 1930s. Then, as now, many turtle traders were turned into soup. As revolutions eat their own children, so too perhaps do major bull markets (bubbles).

Steve

PS The recent craze in selling premium hasn't helped trendies either. Those three cs (collars, condors, covered calls) can throw up walls every bit as powerful as Invisible Woman's force fields. Just look at some of the recent OI action around the QQQQ strikes (March 42, and now 41). There's a pattern there...

Brett Steenbarger, Ph.D. said...

Great observation, Steve. Your idea that "anti-auto-correlation" follows market bubbles is an interesting hypothesis. I might just test that one out! Thanks--

Brett

Steve Haughey said...

Hi again

Should be more specific with respect to my 1930 claims. Obviously, the Big Blue Arrow trend-following a la Dave Landry worked just fine at times. But let's say we run the following quick and dirty "null hypothesis" test on DJIA streak samples, to wit: go (stay) long after up day, go (stay) short after down day.

P&L results for 1/2/30 - 10/7/32: -83.5%

Ouch, pretty brutal for anyone looking for daily follow through, long or short. Especially when compared to

P&L Results for 1/3/95 - 12/31/97: +46.8%

Indeed it's very... ahem... annoying when you realize that from 1950-2000 all one had to do to get astronomically rich was to play the big indices for auto-correlation. Never mind having to find the next Microsoft or trying to be the next Lynch or Buffett. Just use parameters so simple that even a chimp could understand them.

And it's even more annoying to realize that this window on wealth untold has probably been slammed shut for the foreseeable future.

Brett Steenbarger, Ph.D. said...

Very interesting ideas, Steve. It does, indeed, seem as though the door has been shut--and yet, as I posted on my other site--I notice that breakout/trend systems are working well in the Yen and in crude oil. Perhaps there is always a "window on wealth" somewhere... :-)

Brett

Steve Haughey said...

You're right, there is still light! Currencies and commodities have always been trendy... er... trending vehicles par excellence (not surprising that Dave Floyd switched to Forex trading). I can confirm that the chimp-friendly parameters are still working for GLD. May this remain the case until we are all astronomically rich.

I was just bemoaning all the lost hours and days of my life spend poring over company reports and suchlike when I could have been chimping my way to riches. My father gave me a very thorough education in the art of value investing and a keen contempt for "chartists", as he called them. Would that he hadn't...

Brett Steenbarger, Ph.D. said...

Perhaps, Steve, you're familiar with Peter Steidlmayer's recent work on synthetic market indices, in which he combines non-correlated instruments and periodically reweights them in a basket to create synthetic indices that have better trading qualities than any of their individual components. Might be a sophisticated way to be a chimp...

Brett

Steve Haughey said...

Thanks for the tip, I'll have a look. Keep up the great work, Brett.

Steve

Paulo de León said...

Excelent article in Trading Markets once again. As traders so many questions about the current ambience raise: Do we change strategies? or does the cycle is about to end? do we change markets? what markets?, etc....tough questions that makes our carreer so dificult but challenging.
Whatever we decide to do has it´s chances of not working at all or start failing from then on. That´s why trading is risky.

Brett Steenbarger, Ph.D. said...

Hi Paulo,

You're right; those are tough questions indeed. All I know is that, if I'm going fishing, I probably don't want to drop my line where everyone else is, and I'll probably move to another area if I don't find fish biting. I'm increasingly convinced that *what* we trade is just as important as *how* we trade.

Brett