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My name is Frank. I have traded as an individual investor for more than 20 years now. I take a statistical approach in combination with historical market data to profit in the US equity and future markets, focused on intraday and swing trading opportunities (regularly using E-mini futures for... More
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  • Permanent Open Market Operations (“POMO”)
    CartoonStock.com
    Up to now I have never been tracking the Permanent Open Market Operations (or "POMO") activity of the FED (it wasn't in my arsenal of seasonalities like the release dates of the Job Report and the Consumer Price Index, or the FED announcement sessions), but a recent comment to one of my postings inspired me to dig in and check if - and to what extend - a tradable edge might be provided on (or before / thereafter) days where the FED conducts Permanent Open Market Operations (means the FED is 'reinvesting principal payments from agency debt and agency mortgage-backed securities (MBS) in longer-term Treasury securities', see Permanent Open Market Operations - FEDERAL RESERVE BANK of NEW YORK).

    What caught my eye at first glance was the fact that on September 24, 2010 (last Friday), the FED conducted it's 9th coupon purchase of the current month, and there will be 2 more (September 28 and 30) this month for a total of 11 operations.

    Unfortunately historical market data for Permanent Open Market Operations is available from 8/25/2005 to present only (there were 196 operations since 8/24/2005).

    I found a couple of related articles on the web / blogosphere (e.g. an excellent one from Bob English at The Precision Report, as of August 2, 2009), almost all of them assuming / stating that on POMO days (liquidity intervention by the Fed) money is being shuffled into the stock market, with a statistically significant ramp up in major market indexes, especially after the end of the auction (operations are regularly scheduled to begin around 10:15 AM and close at 11:00 AM ET) into the close. But instead of checking what historically happened intraday during the second half of the session on those days where the FED’s Permanent Open Market Operations occurred, I thought it would be more interesting (you'll know why at the end of the posting) to check for the market's
    • end-of-day performance, and
    • successive short- and intermediate-term performance where those POMO days accumulated.
    First of all Table I shows the SPY‘s historical end-of-day performance (since 8/24/2005) on those days where the FED’s Permanent Open Market Operations occurred (assuming one went long on close of a session immediately preceding a POMO day).

    At first glance (Compound Return, Geometric Growth per Trade, Profit Factor) it seems that a tradable edge might be provided, but the above-average profitability on POMO days is mainly due to the significantly below-average percentage of violent losses on those days (e.g. max. loss -3.46%). In fact the probability for a higher close on a POMO day (54.59%) more ore less equals the benchmark probability (random or at-any-time chance) for a higher close, and furthermore the median trade on a POMO day (+0.05%) as well as the Distribution of Returns (the setup's median return in comparison to the benchmark's ranking of daily returns) slightly undercuts the benchmark's median trade (+0.06%) and Distribution of Returns respectively.

    A conclusion might be that even if the FED's liquidity injection is flowing into the stock market on POMO days, this may be limited to those occurrences only where opportunity is provided (lower prices at the end of the auction) - at least mitigating otherwise potential worse losses - , but not chasing the market and entering into highly priced positions after they already have (sometimes rapidly as if on last Friday) increased during the first part of the session. ________________________________

    Especially with respect to the fact that Friday, September 24 marked the 9th occurrence of a POMO day in the current month, the next step was to check for the market's successive short- and intermediate-term performance where those POMO days accumulated. Table II shows the SPY‘s historical performance (since 8/24/2005) assumed one went long on close of any session where at least the following number of FED’s Permanent Open Market Operations occurred during the recent rolling 20-day time frame (the respective last 20 sessions). Up to now the maximum number of Permanent Open Market Operations during any 20 consecutive business days has been 15:
    • Strat. #1 POMO == 0‘: none,
    • Strat. #2 POMO >= 3‘: 3 (or more),
    • Strat. #3 POMO >= 6‘: 6 (or more),
    • Strat. #4 POMO >= 9 ‘: 9 (or more) .

    The FED’s Permanent Open Market Operations seem to have a significant short- and intermediate term impact on the stock market's performance during those time frames where POMO days accumulated. Going long on close of any session where there hasn't been even a single Permanent Open Market Operation during the last 20 sessions would've significantly under-performed the benchmark with respect to Compound Returns (negative), (percentage of) Winning Trades, the Median Trade (especially considering a significantly above-average median losing trade), the Profit Factor and the Distribution of Returns., while going long on any session where there have been 3, 6 or 9 (the more the better) Permanent Open Market Operation during the last 20 sessions would've provided a significant edge.

    But going long on any session where there have been at least 9 (or more) Permanent Open Market Operations during the last 20 sessions would've resulted in a significantly above-average profitability, with a median winning trade of +0.94% (benchmark: +0.57%) almost doubling the median losing trade of -0.49% (benchmark: -0.65%), and a Distribution of Returns significantly above the benchmark's Distribution of Returns of almost 50%. The benchmark's Distribution of Returns of almost 50% indicates that daily returns are relatively evenly distributed on both sides of the mean, typically - but not necessarily - implying a symmetric (normal) distribution, while the setup's Distribution of Returns of 56.99% indicates that the bulk of the values (including the median) lie to the right of the (benchmark's) mean. For demonstration purposes figure I below shows the respective 'profitability density function' for being long on any session where there have been at least 9 (or more) Permanent Open Market Operation during the last 20 sessions, while figure II shows the benchmark's (NYSEARCA:SPY) 'profitability density function' for the time frame from 8/24/2005 to present.

    Figure I

    Figure II

    It seems as if 'someone' always absorbs (into the close) otherwise potential severe losses during those time frames where Permanent Open Market Operations heavily accumulated. Table III below now shows the SPY‘s respective periodic returns (broken down into weekly, monthly, quarterly, semiannual and annual time frames) and a couple of performance metrics (since 8/24/2005):

    Even more amazing are the respective periodic returns. Going long on close of any session where there hasn't been even a single Permanent Open Market Operation during the last 20 sessions would've resulted in a below-average probability of a positive periodic return and a negative median return during any of those periods (from weekly to annual), while going long on any session where there have been at least 9 (or more) Permanent Open Market Operations during the last 20 sessions would not only have resulted in a significantly above-average probability of a positive periodic return, but in a significantly above-average profitability as well (e.g. a median weekly return of +1.42%, and a median quarterly return of +14.08%).

    And last but not least Table IV below shows the SPY‘s probability for at least one higher | lower close over the course of the then following x sessions (with x going from 1 - the next session's close- up to 63, approximately 3 month later), and the SPY's probability for trading higher (posting a higher close) exactly x sessions later (since 8/24/2005) as well:

     

    Whenever there hasn't been even a single Permanent Open Market Operation during the last 20 sessions in the past, this has resulted in an at least slightly below-average probability for at least one higher close over the course of the then following x sessions and a slightly above-average probability for at least one lower close over the course of the then following x sessions, but the market was trading at a higher level 2 and 3 month later on only 1 out of every 3 occurrences (or 36.50% of the time), significantly below the benchmark's probability (58.67% of the time) and random chance for trading at a higher level 2 and 3 month later.

    But whenever there have been at least 9 (or more) Permanent Open Market Operations during the last 20 sessions, chances for at least one higher close over the course of the then following x sessions are (partly significantly) exceeding the respective benchmark's probabilities (and chances for at least one lower close over the course of the then following x sessions are (partly significantly) undershooting the respective benchmark's probabilities), and up to now the SPY posted at least one higher close during the then following 10 sessions on every out of those 144 potential occurrences (trades).

    And even more amazing: Up to now (144 potential occurrences/trades), the SPY was always trading at a higher level 3 month later (latest), but on 9 out of every 10 occurrences (or 89.63% of the time) already 1 month later, significantly better than the respective benchmark's probability (or random chance) for trading at a higher level 1 (60.13% of the time) and 3 (58.67% of the time) month later.

    Conclusions:

    Although with respect to those session where the FED's Permanent Open Market Operation occurred no significant end-of-day edge will be provided, FED's Permanent Open Market Operations accumulated ( e.g. at least 9 during the last 20 sessions) historically had remarkable and statistically significant positive implications with respect to the market's short- (e.g. at least one higher close over the course of the then following 10 sessions) and intermediate term performance looking 1, 2 and 3 month ahead (trading higher 3 month later on all of those 144 potential occurrences/trades). This could very well be a reason for the market's above-average month-to-date performance despite a couple of (negative) seasonalites (e.g. the historical negative week immediately following Septembers triple witching) and setups (e.g. the down-day immediately following the Labor Day exchange holiday). This signal had been triggered on close of Friday, September 14 and will be triggered during any of the following sessions until the running count of the FED's Permanent Open Market Operations accumulated during the then recent last 20 sessions closes below 9. With the FED's Tentative Outright Treasury Operations Schedule showing 2 additional POMO days at the end of September and at the beginning of October, the running count will not fall below 9 for the foreseeable future. Successful trading,

    Frank

    ________________________________

    If you might want to be instantly notified about what’s happening in the markets and at TRADING THE ODDS, I encourage you to subscribe to my RSS Feed or Email Feed, and (or) follow me on Twitter.

    ________________________________

    Remarks: Due to their conceptual scope - and if not explicitly stated otherwise - , all models/setups/strategies do not account for slippage, fees and transaction costs, do not account for return on cash and/or interest on margin, do not use position sizing (e.g. Kelly, optimal f) - they're always 'all in' - , do not use leverage (e.g. leveraged ETFs) - but a marginable account is mandatory - , do not utilize any kind of abnormal market filter (e.g. during market phases with extremely elevated volatility), do not use intraday buy/sell stops (end-of-day prices only), and models/setups/strategies are not ‘adaptive‘ (do not adjust to the ongoing changes in market conditions like bull and bear markets).

    ________________________________

    Disclaimer

    The information on this site is provided for statistical and informational purposes only. Nothing herein should be interpreted or regarded as personalized investment advice or to state or imply that past results are an indication of future performance. The author of this website is not a licensed financial advisor and will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on the content of this website(s). Under no circumstances does this information represent an advice or recommendation to buy, sell or hold any security.

    I may or may not hold positions for myself, my family and/or clients in the securities mentioned here. Actions may have been taken before or after information is presented, and any opinions expressed in this site are subject to change without notice. (Data courtesy of MetaStock , and for data import, testing, surveys and statistics I use MATLAB from MathWorks)
    ________________________________


    Disclosure: No position
    Tags: SPY
    Oct 04 3:36 AM | Link | Comment!
  • Trading the RSI(2) from 1950 to 2009

    A few days ago Michael Stokes at MarketSci made an excellent post concerning RSI(2) readings, the changing frequency of extreme readings, its (the RSI's) quality of forecast and efficiency of trading short-term mean-reversion in the markets over the course of time since 1950 (Extreme RSI(2) Readings Becoming Less Common, and he already covered the topic here and here), and based on his findings and conclusions -for exemplary purposes- I set up a static trading strategy (static means no adjustments of RSI time frame and break points) for the time frame since 1993 (SPY, see Trading the RSI as a Static Strategy) which would not only have been profitable over the course of time but would have been outperformed the index as well (and on top of that with a lesser maximum month-end drawdown).

    But what would Michael's finding that extreme RSI(2) readings currently become less common than in the past mean percentage-wise concerning a potential RSI(2) strategy ?

    I conducted the same analysis for the time frames from 1950 until 1970, 1970 until 1990 and 1990 until 2009 for the S&P 500 with a 2-day RSI as I did for the static trading strategy with an RSI (2.5) for the SPY, meaning I determined the distribution of gains and losses on those sessions (the first and second day thereafter) immediately following a session when the S&P 500 RSI(2) closed between a lower and upper break point in order to evaluate an ideal exit point for a potential RSI(2) strategy (where the sum of all gains minus the sum of all profits = expectancy turns from positive to negative, which means -on average- the maximum possible gain on the upside would have been achieved).

    For the three different time frames from 1950 to 1970, 1970 to 1990 and 1990 to 2009 , the following tables Table I to Table III show the respective distribution of profits and losses for the S&P 500 and the RSI(2) over the course of the then following 2 sessions, broken down by different ranges (potential upper breaking points) for the RSI (2), assumed one would've bought the S&P 500 on close of every session when the RSI (2) closed anywhere between the lower and the upper break point (no overlapping trades allowed). Please take a special look at the third last row ('Profitability').

    Table I (1950 - 1970)

    http://tradingtheodds.files.wordpress.com/2009/04/survey-20090424-rsi-1950-1970-1.png?w=700&h=323

    Regarding the time frame from 1950 until 1970

    • all RSI(2) readings above 70 led -over the course of the then following two sessions- on total to profitable trades if one would have bought the S&P 500 on close of a session with an RSI(2) reading between the lower and upper break point,
    • all RSI(2) readings above 70 show positive win/loss ratio, profitability and profit factor significantly above the at-any-time profit factor for the time frame from 1950 until 1970, and
    • there were significantly more extreme RSI(2) readings between 90 and 100 than between 70 and 90 combined (the sum off all occurrences between 70 and 90),
    • and RSI(2) readings between 90 and 100 show the highest profitability of all RSI(2) ranges.

    So any RSI(2) strategy build upon a potential short on any RSI(2) reading above 90 would have been a clear receipt for disaster, and the upper break point would had to been set close to 100 in order to achieve maximum gains on the upside.

    ____________________________________

     

    Table II (1970 - 1990)

    http://tradingtheodds.files.wordpress.com/2009/04/survey-20090424-rsi-1970-1990-1.png?w=700&h=323

     

    Regarding the time frame from 1970 until 1990

    • all RSI(2) readings above 70 led -over the course of the then following two sessions- on total to profitable trades if one would have bought the S&P 500 on close of a session with an RSI(2) reading between the lower and upper break point,
    • all RSI(2) readings above 70 show positive win/loss ratio, profitability and a profit factor either slightly, partly significantly above the at-any-time profit factor for the time frame from 1970 until 1990, and
    • the amount of extreme RSI(2) readings between 90 and 100 approximately equals the total amount of RSI(2) readings between 70 and 90 combined (the sum off all occurrences between 70 and 90),
    • and RSI(2) readings between 80 and 90 show the highest profitability of all RSI(2) ranges.

    So any RSI(2) strategy build upon a potential short on any RSI(2) reading above 90 would have been still a clear receipt for disaster, and the upper break point would had to been set close to 90 in order to achieve maximum gains on the upside.

    But profitability and total amount of extreme RSI(2) were less extreme than the respective figures concerning the time frame from 1950 until 1970.

    ____________________________________

    Table III (1990 - 2009)

    http://tradingtheodds.files.wordpress.com/2009/04/survey-20090424-rsi-1990-2009-1.png?w=700&h=323

    Regarding the time frame from 1990 until 2009

    • only RSI(2) readings between 75 and 80 led -over the course of the then following two sessions- on total to profitable trades if one would have bought the S&P 500 on close of a session with an RSI(2) reading between the lower and upper break point,
    • only RSI(2) readings below 80 show positive win/loss ratios and a profit factor close to the at-any-time profit factor for the time frame from 1900 until 2009, and
    • the amount of extreme RSI(2) readings between 90 and 100 approximately equals half of the total amount of RSI(2) readings between 70 and 90 combined (the sum off all occurrences between 70 and 90).

    So any RSI(2) strategy build upon a potential short on any RSI(2) reading above 90 could have been profitable for the first time since 1950, and the upper break point would had to been set somewhere between 70 and 80 in order to achieve maximum gains on the upside

    So I completely agree with Michaels bottom line (cit.) '... the markets are becoming more contrarian in the short-term. That means the market tends not to move in a single direction for as long, which means that the market tends to register less extreme readings on short-term indicators such as this one.'

    Successful trading,

    Frank

    Disclosure: No positions at time of writing in the securities mentioned in this post.

    Tags: SPY
    Apr 24 1:29 PM | Link | Comment!
  • Follow-up on Trading the Odds on Friday - April 17, 2009

    This is a follow-up on my post Trading the Odds on Friday - April 17, 2009.

    In my previous post I mentioned that we witnessed a very strong breadth (NYSE Advancing Issues/Declining Issues and the NYSE Advancing Volume/Declining Volume) during the last couple of sessions, but on Thursday -although a heavily lopsided breadth session with NYSE Advancing Issues/Declining Issues and the NYSE Advancing Volume/Declining Volume both greater than 3.5- the SPX by contrast posted a 'relatively small end-of-day gain' of +1.55% ('only').

    Of course to mark a gain of +1.55% as 'relatively small' doesn't sound overly modest, but you have to take such a gain into context.

    Since 10/01/2007 there were 39 occurrences when the ratio of NYSE Advancing Issues/Declining Issues and NYSE Advancing Volume/Declining Volume both closed above 3.5. The following table shows the SPX‘ (S&P 500) behavior and the respective performance

    • the day the signal was triggered (close -trigger day-),
    • the session following the session on which the signal was triggered (close -next day-), and
    • the performance (end-of-day change) three days later in comparison to the close on the trigger date.

    Especially notable is the last column 'on average' due to the fact that

    • on average, on the day the signal was triggered (NYSE Advancing Issues/Declining Issues and NYSE Advancing Volume/Declining Volume both closed above 3.5) the SPX gained +3.74% (compared to yesterday's +1.55% gain 'only', which is one of the smallest gains on record concerning this setup since 10/01/2007),
    • on average, the SPX posted an intraday low -1.70% below the trigger day's close on the next session, while by contrast it posted an intraday high of -on average- +0.92% above the trigger day's close on the next session.
    • on average, the SPX closed -1.07% three days later.

    To make a long story short: At least over the course of the next couple of sessions (1-3) upside potential will probably not only be limited, but the odds (potential payout and expectancy, NOT the true chances that the event -in this case the probabilities for a higher or lower close- will occur) are tilt in favor of the short side of the market.

    No. Date high low close (trigger day) close (next day) 3 session(s) later
    1 04/09/2009 +0,90% -1,31% +3,81% +0,25% -0,53%
    2 04/02/2009 +0,97% -0,92% +2,87% +0,97% -2,26%
    3 03/23/2009 +0,09% -2,12% +7,08% -2,02% +1,21%
    4 03/18/2009 +1,12% -1,58% +2,09% -1,30% +3,60%
    5 03/17/2009 +3,20% -1,60% +3,21% +2,09% -1,23%
    6 03/12/2009 +1,01% -1,10% +4,07% +0,77% +3,65%
    7 03/10/2009 +1,71% -0,80% +6,37% +0,24% +5,13%
    8 02/24/2009 +0,90% -2,62% +4,01% -1,07% -4,92%
    9 02/06/2009 +0,74% -0,80% +2,69% +0,15% -4,01%
    10 01/28/2009 -0,59% -3,43% +3,36% -3,31% -5,57%
    11 01/21/2009 -0,06% -3,45% +4,35% -1,52% -0,44%
    12 01/02/2009 +0,52% -1,32% +3,16% -0,47% -2,70%
    13 12/31/2008 +3,49% -0,43% +1,42% +3,16% +3,48%
    14 12/30/2008 +2,21% -0,11% +2,44% +1,42% +4,13%
    15 12/16/2008 +0,62% -1,89% +5,14% -0,96% -2,77%
    16 12/08/2008 +0,72% -2,67% +3,84% -2,31% -3,97%
    17 11/26/2008 +0,97% -0,73% +3,53% +0,96% -4,38%
    18 11/24/2008 +2,01% -1,97% +6,47% +0,66% +5,22%
    19 11/04/2008 -0,39% -5,56% +4,08% -5,27% -7,43%
    20 10/30/2008 +3,17% -1,00% +2,58% +1,54% +5,41%
    21 10/28/2008 +3,13% -1,94% +10,79% -1,11% +3,00%
    22 10/20/2008 +0,00% -3,34% +4,77% -3,08% -7,84%
    23 10/13/2008 +4,08% -3,12% +11,58% -0,53% -5,67%
    24 09/30/2008 +0,06% -2,19% +5,42% -0,45% -5,76%
    25 09/19/2008 +0,02% -3,94% +4,03% -3,82% -5,51%
    26 08/28/2008 -0,24% -1,38% +1,48% -1,37% -1,98%
    27 06/05/2008 -0,28% -3,14% +1,95% -3,09% -3,25%
    28 04/18/2008 -0,01% -0,80% +1,81% -0,16% -0,75%
    29 04/16/2008 +0,29% -0,55% +2,27% +0,06% +1,72%
    30 04/01/2008 +0,57% -0,63% +3,59% -0,19% +0,02%
    31 03/24/2008 +0,56% -0,64% +1,53% +0,23% -1,79%
    32 03/18/2008 +0,81% -2,43% +4,24% -2,43% +1,44%
    33 03/11/2008 +0,95% -0,97% +3,71% -0,90% -2,46%
    34 02/01/2008 -0,00% -1,13% +1,22% -1,05% -4,94%
    35 01/28/2008 +0,81% -0,28% +1,76% +0,62% +1,82%
    36 12/06/2007 +0,20% -0,31% +1,50% -0,18% -1,97%
    37 11/28/2007 +0,33% -0,73% +2,86% +0,05% +0,23%
    38 11/23/2007 +0,37% -2,40% +1,69% -2,32% +1,97%
    39 11/13/2007 +0,75% -0,96% +2,91% -0,71% -1,51%
      on average: +0,92% -1,70% +3,74% -0,68% -1,07%

     

    Successful trading,

    Frank

     

    P.s.: Wordpress recently implemented a Twitter widget, so I'll regularly make some intraday updates as well using Twitter (as I already did during the last couple of session, but unfortunately there seems to be a connectivity issue between Wordpress and Twitter; hope that will be solved soon). If you're interested in, please have a look at the blog during the trading session as well or subscribe directly to Twitter (recommended).

     

    Disclosure: No positions in the securities montioned in this post at time of writing.

    Tags: SPY, SPY
    Apr 17 2:42 AM | Link | Comment!
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