On Short Term Price Trends in Russia's Stock Market

This is the fourth contribution to the MarketSci Blog from Andrey S. of Russia (along with the trading nuggets here, here, and here).

In this post, Andrey shows that, like India, day-to-day changes in the Russian stock market behave opposite of the US: they are momentum, not contrarian driven. This has huge consequences for all short-term indicators, such as blogosphere fav RSI(2).

A simple illustration…

[logarithmically-scaled]

The graph above shows the results of two trading strategies: one going long Russia’s RTS Index at today’s (theoretical) close if the market closed up today (green) and the other if it closed down (red), from 1996.

Geek note: this is a proof of concept, so these results are frictionless (i.e. do not account for transaction fees or slippage). Also, I’ve used the version of the index denominated in U.S. Dollars (more on this in a bit).

Obviously, the Russian market demonstrates tremendous daily follow-through; up days tend to be followed by up days, and vice-versa. But recall that this is the exact opposite of what we see in the U.S. today (read more here and here) where short-term movement is very much contrarian; up days tend to be followed by down days, and vice-versa.

A different view…

[logarithmically-scaled]

The graph above shows the same data in a single “portfolio”, assuming we traded long following a close up, but short following a close down (frictionless).

There are two oddities about the results above: (1) the bend in the equity curve where I’ve placed the red arrow, and (2), very different results over the last year or so when viewing the index denominated in Rubles (rather than USD). More on both of these oddities in part 2 of this post.

Happy Trading.

Comments

[Mad Hedge F...:]

Thanks for the data. Last January I was extremely positive about building long equity exposure in Russia, one of the two BRICKS that is a big energy exporter (See madhedgefundtrader.com...). I predicted that the RSX would deliver double the upside of the S&P 500. Well I lied. It actually came in at 2.4 times the US market performance. It even would have worked as a pairs trade, long Russia, short the US. This turned out to be an oil play on steroids, and a recovery in the ruble gave you a nice hockey stick effect in the dollar traded ETF. The bounce in the Russian currency stopped the country’s reserve outflow dead in its tracks, and enabled the Russian Central Bank to start shaving interest rates from the nosebleed territory of 13%. There is plenty of room for further cuts. Russia is not out of the woods yet. Some 30% of the $780 billion in corporate debt is due for rollover this year, the unemployment rate is at 9.5% and climbing, and ruble short term rates are at a sky high 15-20%. It also doesn’t help that they lock up oligarchs on bogus tax charges, and will expropriate foreign assets, as they did with Shell, at the drop of a hat. But none of my investors told me I could only do business with nice people who gave me a warm and fuzzy feeling. I had to bribe my late wife out of Moscow’s notorious Lubyanka prison once. But a rising oil price atones for all sins. Use this dip in crude to add to your positions, but watch out for the volatility.

Jun 29 10:28 AM