Buying N Day Lows

Buying the market at N-day lows and holding until a close above the N-day moving average can be a profitable approach. Take a look at the plot above. The plot shows the equity curve for buying SPY at 10 day lows. The method has a win rate of 81% with an average return of 0.8% per trade. There can be long painful waits for the market to rebound above the 10 day moving average as have occurred during recent market crashes. However, this approach appears to be a solid performer and may be suitable to form a portion of a mechanical trading system.

Just Do It

The only way to become confident about your trading is to trade.

The heart of karate is real fighting.
There can be no proof without real fighting.
Without proof there is no trust.
Without trust there is no respect.
This is a definition in the world of Martial Arts.
-- Sosai Mas Oyama

The 3x2 System and the Crash System

The '3x2 System' experienced a major setback during the market crash. It began to recover in October, but has since experienced further adversity. (See the plot above.)



The 'QQQQCrash System' also experienced major problems during the market crash, but has since made a substantial recovery. (See the plot immediately above.) Also note that the Crash system has a greater tendency for more variability in its equity curve.

Conclusion: Active trading can be very powerful, but it is probably best to diversify your methods and markets traded.

International Perspective

The big winner of the past month was Indonesia (IF) which was up 38%. (The image above shows the price change for the past month for various international ETFs.) Among the BRIC countries, China (FXI) did well while Brazil (EWZ), Russia (RSX), and India (IFN) lagged. Russia (RSX) continued in last place with a one month return of -4%. The US market (SPY) was in the bottom third of the selected markets. There is still some value in diversification. (See my post from October.)

Short Term Correlations - Still High

The 20 day rolling correlations of various asset classes to SPY have remained near recent market crash levels. Foreign stocks (EFA) and commodities (DBC) have not yet cycled back into the range of the prior couple of years. (See plots above.) Is there any hope for a sustained stock market rally with correlations between asset classes remaining higher than usual?

The correlation of the SPY to VIX has recently become less negative. It is at levels not seen since early 2008. (See plot above.) Is the panic beginning to fade? Can the market sustain a range bound trade without another crash?

Who Is John Galt?

Then it was said that large, established railroad systems were esential to the public welfare; and that the collapse of one of them would be a national catastrophe; and that if one such system had happened to sustain a crushing loss in a public-spirited attempt to contribute to international good will, it was entitled to public support to help it survive the blow.

Alternate Asset Classes

Managed futures (RYMFX) and gold (GLD) are the exceptions among alternative asset classes in that they have a positive return over the past year. Most alternative asset classes have collapsed with the stock market. Merger arbitrage (MERFX) has experienced a modest loss while long-only commodities (DBC), S&P 500 buy write (BEP), and carry trade (DBV) have generated large losses.

When the gales of November came early

The market move up from the November lows has been impressive. The market has held up well in the face of bad news in the past week. The Thanksgiving trade is doing very well and the seasonality remains strong into mid-January.

Volatility remains high. Can the market continue to rally into the end of the year? Into January? Bigger picture, will the various bailouts allow us to avoid a major deflationary collapse? Even if that can be avoided, will there then be an inflationary collapse?

Can we make it safely to Whitefish Bay...

The ship and the wreck is described here. The Gordon Lightfoot song MP3 can be downloaded here. The song lyrics are here.

Update: Asset Class Rotation

My September and August 'Asset Class Rotation' posts described a simple rotation scheme that buys the top 3 of 5 asset classes each month. The asset classes used were US Stocks, foreign stocks, US REITS, US Bonds, and commodities. The October/November market crash has taken its toll on the equity curve (shown above). However, the rotation scheme did reduce the amount lost. Should any asset allocation scheme include a method to reduce exposure and then increase exposure later?

Update: Dividend Aristocrats

The Dividend Aristocrats have continued to perform better than SPY since late September. (See the plot above.) Will Low Beta/Low R-Squared stocks continue to increase their advantage over the market?