Thursday, December 9, 2010

S&P 500 Highs, but NYSE Breadth Does Not Follow: Negative Bias?

I've been seeing a few tweets and posts warning about the 'negative' divergence between the S&P 500 making new highs but NYSE breadth not following. For NYSE breadth, I'm using the cumulative Advance/Decline line. Some folks use the 10 day average of the NYSE Adv/Dec or the NYSE Summation Index, but I think they convey the same idea for the most part.





So I wanted to do a little study: what happens when the S&P 500 makes a new 50 day high, but NYSE breadth does not?


SPX reaches 50 day high while Cumulative NYSE Adv/Dec does not, Buy SPX > 200 day MA; sell n days later.  $10,000 per trade; 1950 to present.
Exit n
Days
Net Profit
# Trades
# of winners
% of Winners
Max. Trade % DD
Avg % P/L
W. Avg. Profit
L. Avg. Loss
Profit Factor
Payoff Ratio
1
         2,006.29
545
299
54.86
-4.64
0.04
         47.75
         (49.89)
1.16
0.96
2
         4,500.66
451
257
56.98
-6.62
0.10
         74.17
         (75.06)
1.31
0.99
3
         3,975.15
408
237
58.09
-6.62
0.10
         88.91
         (99.98)
1.23
0.89
4
         3,265.75
379
211
55.67
-6.62
0.09
       109.29
      (117.83)
1.16
0.93
5
         6,876.79
349
198
56.73
-7.35
0.20
       128.36
      (122.77)
1.37
1.05


This is what it looks like 1 week out. It's from 1950 though, so keep that in mind.


SPX reaches 50 day high while Cumulative NYSE Adv/Dec does not, Buy SPX > 200 day MA; sell n weeks later.  $10,000 per trade; 1950 to present.
Exit n
Weeks
Net Profit
# Trades
# of winners
% of Winners
Max. Trade % DD
Avg % P/L
W. Avg. Profit
L. Avg. Loss
Profit Factor
Payoff Ratio
1
         6,876.79
349
198
56.73
-7.35
0.20
       128.36
      (122.77)
1.37
1.05
2
         6,511.71
274
158
57.66
-9.37
0.24
       187.06
      (198.65)
1.28
0.94
3
      10,022.25
242
151
62.40
-9.65
0.41
       239.52
      (287.32)
1.38
0.83
4
      12,282.92
216
130
60.19
-11.86
0.57
       270.55
      (266.15)
1.54
1.02
5
      13,425.92
195
112
57.44
-11.86
0.69
       333.10
      (287.72)
1.56
1.16
6
      14,770.66
184
112
60.87
-16.77
0.80
       351.31
      (341.34)
1.60
1.03


Here's how it looks 6 weeks out. Positive? What? Since we all know that the markets today are very different than they were back in the '50's and '60's, I wanted to test a more recent period. Let's use 2000 to present.


SPX reaches 50 day high while Cumulative NYSE Adv/Dec does not, Buy SPX > 200 day MA; sell n days later.  $10,000 per trade; 2000 to present.
Exit n
Days
Net Profit
# Trades
# of winners
% of Winners
Max. Trade % DD
Avg % P/L
W. Avg. Profit
L. Avg. Loss
Profit Factor
Payoff Ratio
1
          (904.10)
45
23
51.11
-2.38
-0.20
         34.37
         (77.03)
0.47
0.45
2
          (436.19)
42
18
42.86
-3.62
-0.10
         68.83
         (69.79)
0.74
0.99
3
            (79.38)
40
20
50.00
-3.75
-0.02
         83.80
         (87.77)
0.95
0.95
4
          (338.80)
37
17
45.95
-3.75
-0.09
         95.15
         (97.81)
0.83
0.97
5
          (136.74)
35
18
51.43
-3.75
-0.04
         88.69
      (101.95)
0.92
0.87


One week out, a little negative.

Now what about 6 weeks out:


SPX reaches 50 day high while Cumulative NYSE Adv/Dec does not, Buy SPX > 200 day MA; sell n weeks later.  $10,000 per trade; 2000 to present.
Exit n
Weeks
Net Profit
# Trades
# of winners
% of Winners
Max. Trade % DD
Avg % P/L
W. Avg. Profit
L. Avg. Loss
Profit Factor
Payoff Ratio
1
          (136.74)
35
18
51.43
-3.75
-0.04
         88.69
      (101.95)
0.92
0.87
2
          (808.49)
31
15
48.39
-5.62
-0.26
       117.94
      (161.10)
0.69
0.73
3
          (340.58)
29
18
62.07
-7.32
-0.12
       182.60
      (329.77)
0.91
0.55
4
      (1,010.49)
27
12
44.44
-11.13
-0.37
       213.28
      (237.99)
0.72
0.90
5
            (48.77)
24
13
54.17
-11.13
-0.02
       233.08
      (279.90)
0.98
0.83
6
          (229.29)
23
13
56.52
-11.13
-0.10
       292.06
      (402.61)
0.94
0.73


Slightly negative, but not by much. Your odds of being correct are about 50%, but since the average loss is greater than the average win, you have negative expectancy.

Overall, the results surprised me. I was really expecting an uber-bearish bias based on the way people talk about it. Maybe there is some bearish bias but it takes more than 6 weeks to develop? (I didn't test that far out because I don't care right now.)  Maybe the entire NYSE breadth is not the ideal correlation to the S&P 500? Or maybe my time frame for new highs (50 days) is not the best? I'm not really sure. I do know that this study definitely isn't saying "buy buy buy" but it's not "sell sell sell" either. It looks pretty neutral, lacking an edge. Doesn't the market feel that way right now? A little choppy, not much edge.

Food for thought.

Good trading out there.

3 comments:

derek said...

good stuff, Chris...took me awhile to realize that the corollary to "weak breadth" is "strong index". have found it tough to code, too much context needed for a simple 2 factor model but "market of stocks" still as important to track as stock market

Chris said...

Derek,

I am really just learning on the fly. I read an article/tweet/post, then want to test it out. I agree that 2 factors may be just too simple. I am all about simplicity but there are limitations. If some there was something tangible here, strong bias either way, I would explore further, looking to combine other indicators/studies. It is always a good exercise though.

Mike said...

The graphs and stats are done in excel. There are some AFL output that I copy into excel, then tweak for presentation.
cheap stock trading

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