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Djvu
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- Investing style - pure value driven with minimum target returns of 2x in < 1 or max 2 years with lowest possible risk to reward ratio. - Trading Style - My trading bias is mostly only on the short side . i.e buying puts,shorting calls. - Market focus - investing in Indian stocks and... More
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Saanpaurseedi aka Snakes and Ladders
  • Timing exit from a bull market -Backtesting Mean Reversion to the 200 DMA - NIFTY NSE INDIA 3 comments
    Nov 5, 2009 7:59 AM | about stocks: INDY, PIN, EPI, INP
    Backtesting Mean Reversion to the 200 DMA

    Well the objective of this post is to backtest a simple market reversal indicator to idenfity market tops in bull markets. Or in plain words timing the exit from the Bull market.

    After going through last years market crashes where Indian markets key indices fell 60% , the Sensex -fell from peak of ~20,000 to 8,000 and NIFTY fell from 6200 to 2500, I did a `technical` study. I gone through the charts and observed that in end 2007, when most global markets were at their peak levels, the gap ( or spread) between the current price and the 200 DMA (simple days moving average) was unusually large. For the India NIFTY index the peak spread was ~ 40%.
    Now like most technical indicators suggest markets can remain overbought or oversold for weeks or months.
    So to capture the duration of overbought period, I added another filter which is consecutive trading days where the 200 DMA spread was above +30%. 
    Then when the spread went below this level +30% , I then measured the NIFTY performance 1 month , 2 months and 3 months later. The results are given below in the table.
    The period taken is from 1993 to till date or 4600 trading days or 18 years.
    NIFTY Mean reversion 200 DMA saanpaurseedi
    The table shows that
    1. Market toppish 200 DMA spread indicator occurs rarely - In the past 18 years , the pattern has been observed only 12 times or around once every 1.5 years.
    2. After hitting peak spreads, markets fall sharply over the next 1 to 3 months. The market falls from peak levels 15%,17% and 24%  -  1 month later , 2 months and 3 month later respectively
    3. Clear evidence of Mean Reversion to  the 200 DMA - The 200 DMA spread drops of peak 200 DMA spread of 38% to 13%, 6% and 0% -1 month later , 2 months and 3 month later respectively
    Would like to see similar tests for say the S&P 500. as the S&P also was at peak spread of +20% above its 200 DMA 1 week ago.
    Disclosure - short NIFTY and some Indian large caps since the last 1 week.
    Themes: NIFTY 200 DMA Mean Reversion Stocks: INDY, PIN, EPI, INP
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  •  
    just wanted to add that the Key takeaway from the NIFTY mean reversion study is that by 28-Feb-2010 one can expect a 24% correction.In this recent bull market, 1st sell signal was signaled on 21st Oct 2009 ( see the table in the post seekingalpha.com/insta... ), 90 trading days after will be in 28th Feb 2010. And historically the 90 days median correction is 24%.
    26 Jan 2010, 04:42 PM Reply Like
  •  
    1) the problem with the above strategy is the exit is set to the nifty low ( and god only can forsee what that low would be )
    2) any such trading strategies where the exit is set to a future low or a future high , will always be profitable , it would make sense to set the close to the a future closing price , say close after 10 days , or 20 days etc ...
    tradeiq.in
    13 Jan 2011, 09:53 AM Reply Like
  •  
    Hmm. Yes. Agree with your point. But I`m still sticking my the useful-ness of the pattern. Yes it will not give you a laser-like accurate market -timing strategy but helps you in building a stronger thesis. Ok now , based on pure mean reversion my bet would be a 20-30% correction for India`s NIFTY in 2011. I would say early 2011 by Mar`11. The rationale is that NIFTY has risen 160% from Mar`09 low in just 20 months but the max correction we have seen is four 10% in the past 20 months. Other countries that have seen lesser gains of less than 80% in the same period have given correction of 32% -China, 23% Nikkei, 17% - S&P500. 3 major stock indices corrections in 2010 charts here seekingalpha.com/user/... and and Sensex past history of bull market rallies and following big corrections charts here seekingalpha.com/insta...
    13 Jan 2011, 08:04 PM Reply Like
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