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Timing Is (Almost) Everything
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Timing Is (Almost) Everything

by The MoleJune 5, 2011

With almost everything in life there is an element of seasonality to be considered before embarking on a particular activity, journey, or mission. For instance, when attempting to ascend a previously unconquered mountain you most likely want to first observe weather patterns throughout several seasons and then pick the best route at the best time – which combined will increase your odds of reaching that coveted peak. When planning a trip to Paris you will most likely consider spring or autumn instead of the dead of winter. Skiing in the Austrian Alps is best enjoyed in late fall or early spring and you won’t be finding many operating skilifts in mid June. So we can all agree that the concept of seasonality is deeply ingrained in our human nature and culture as it roots back throughout the millennia all the way to the very dawn of life on this planet.

As the financial markets are largely driven by human nature and human psychology it thus not surprising to observe a cyclical dimension which many scholars have devoted much time and effort quantifying. Ralph N. Elliott for instance is famous for his study of the wave principle in stock markets that is known today as the Elliot Wave Principle. In his comprehensive work he identified fractal bull and bust cycles which he recognized as patterns that appear to repeat themselves on various time intervals, from just a few minutes all the way to years, decades, and even centuries. Chris Carolan, a friend of the blog, wrote a fascinating book called the Spiral Calendar, which defines time intervals from a derived Fibonacci series based on moon cycles (29.53 days). The basic Spiral Calendar thesis is that emotional market turns are linked to past emotional market turns by Spiral Calendar time units in quantities greater than random. Although this may all sound highly exotic to the unexposed reader I would strongly recommend Chris’ work, which since has evolved into defining Solunar models for various markets (i.e. Dow, Gold, etc.). As a matter of fact much of what Volar and I present here today has been confirmed by Carolan’s work, despite the fact that Volar’s charts are purely statistical in nature. It’s always fascinating and a bit rewarding to have your own work supported by a completely different theory.

To boot here is a basic concept chart Volar produced a few weeks back – I really like how he used color codes to represent four main seasons throughout the trading year. As you can see we just entered the ‘vacation’ season and historically it averages to the downside. When compared to the 200-day SMA the rate of ascend during the vacation season is rather mild when compared with the Holidays or Easter seasons.

It thus no surprise to see this basic seasonality reflected in the chart above. Apparently being long between March – April, during July, and then again from October all the way through January appears to have clear statistical support. And yes, to my very own surprise October is often a pretty good month – once you exclude the 1987 and 2008 crashes.

But wait – we’re only getting warmed – go grab a cup of tea or java, there are plenty of charts to go:
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Charts and commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.
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S&P easonality measured since 1950 clearly shows the good (DEC, APR, NOV, MAR), the bad (MAY, AUG), and the ugly (SEP, FEB, JUN). But Mole – why are you calling SEP, FEB, and JUN, the ugly? After all, a down month can be a very good month if you happen to be shorting the market! Well, although there appear to be clearly positive cycles you will soon see that there are no clear negative cycles. Volar was able to identify several months with a slightly negative slant but I was not able to identify a clear edge.

This shows the average percentage of return had you been long the S&P. It doesn’t take a sophisticated pattern analysis algo to identify which weeks of the year have been statistically positive for the past sixty years. This greatly reflects my own observations over the years (and that of my peers) and as such the old trader adage ‘Go away in May’ seems to hold a lot of truth. Those old ticker reading pit traders apparently knew a thing or two about seasonality.

Before you all cancel your subscription for the next four months I must however point out that ‘no edge’ does not necessarily mean ‘no profits’. And the chart above supports my intention to start covering delta neutral option strategies in the coming months. Just because price isn’t moving in a clear direction it doesn’t mean we can’t be selling theta or vega. After all there are many ZH reading doom sayers willing to buy vega after a strong push to the upside 😉

I actually saw this chart after I had highlighted the previous one myself – apparently Volar seems to be on the same page when it comes to picking ‘easy money periods’. Sharpe Ratio reflects the ratio of return in relation to standard deviation and again weeks 10-19 and 44 to 1 stand out. The lessons for the bears: Don’t be short during these periods! The lesson for the bulls: Don’t waste theta with long term calls starting in mid May.

This chart again plots positive growth expectations in percentage terms. To be clear – we are not looking at the odds of growth but the average percentage of grown. Again, it seems that late Apri, May and December are non brainers for the longs. I don’t see a clear cluster of negative growth for the bears however – where there are successive down bars the intensity does not justify taking the risk IMNSHO.

Lesson learned: Life is tough for a bear.

Since it’s June let’s analyze performance cycles across the last 60 years. Volar seems to think that there is a six year cycle and maybe he’s right. I would however prefer to see the more consistent months being plotted like this. How about it Volar – can we make this a follow up post for next Sunday? 😉

Trading range – a.k.a. ATR: Although December appears to be a no brainer for the longs there appears to be limited trading range due to the holidays. October produced two crashes in the past quarter century so I’m not surprised it pops out a little. But the real fun happens in January and that actually in the first week or two. Usually there is a ramp followed by a drop in the second or third week, plenty of opportunities to play the swings and we should mark our calendars. As you can see February just outright sucks – depending on your perspective – if you love delta neutral strategies then February is your ticket. Volar – I would love to see a VIX correlation analysis relative to February and December – could be valuable in the context of volatility plays.

Here we are looking at the average return on long trades on a monthly basis. March and April is where the money is – so is October through January. And yes, we are now in one of the lousiest months of the year for directional plays and thus we better start covering some smart option plays that leverage sideways tape. Any option addict takers?

Directional bias means deviation from the current trend. Actually I’d be really curious as to how Volar calculated this one as the math can be quite complex. The main trend needs to be defined and quantified, after which you calculate the skew. October again stands out with two party surprises in the past quarter century. Lesson learned – markets love to crash in fall. However bear in mind that October can also be a good month. So, second lesson learned: October can be good to the bears – but when it’s not it gets really ugly. Let’s call October the year’s PMS month (my apologies in advance to any female readers).

If you take each month on its own this chart shows how many of the last sixty were positive on a percentage basis. Again, December is the no-brainer for the longs, no matter how we look at it, closely followed by April. September apparently is on the bottom of the pack, but let’s not forget that this is NOT a complete bar, anything below 42% is cut off. Meaning all months in the last sixty years were positive at least 44% of the time. If you do the math this comes out to 26 months out of 60.

Analog years are those that resemble the current year in direction and form – Volar picked five candidates that appear to have followed a similar path as 2011. Based on those analogs we are looking at a sideways summer and a bullish fall. Of course our mileage may vary – this does not mean we can’t suddenly change directions, in which case Volar would have to map 2011 to other analog years. Hope this makes sense.

Feel free to use this chart as a pattern for your next wall paper. As you can see we are looking at the same analogs (plus 1997) but the respective lines plot a 25-day SMA of CBOE call/put activity. I assume Volar uses call/put instead of put/call plots to map it to directional/price moves in the S&P (please feel free to correct if I got this one wrong).

The AAII is a popular sentiment measure published by the American Association of Individual Investors. Volar selected years with a bullish bias and lined them all up with each other. The problem with this chart is that the swings make it difficult to make a proper correlation so I asked him to index it differently.

And that was the result – isn’t that a lot better? As you can see creating order on a chart sometimes requires shifting plots against each other and unfortunately I don’t know of a single charting package that supports that. I guess I could write my own – my TOS left chart script could be extended to accommodate some type of vertical indexing.

I hope you all enjoyed this post and perhaps store is as a bookmark for future reference. In addition to system discipline, capital commitment guidelines, market exposure weightings, and stop loss provisions it seems that seasonality potentially can give us that extra edge for picking the most effective trading strategies at the proper right time. I strongly encourage discussion and proposals as to how we can leverage this data in the coming weeks and months. After all I can’t do it all on my own 😉

Many thanks to Volar for producing this set of charts – quite frankly this quality of analysis is usually not available to retail traders and institutions pay thousands of Dollars for this type of data. We are all grateful for your contributions, Volar – keep up the good work.

Cheers,

Mole

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About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at various social media waterholes below.
  • http://practicalt.blogspot.com/ Gold_Gerb

    First.
    the most loyal (perhaps oldest) leech.
    http://www.youtube.com/watch?v=2tpkkS612uM&feature=related

  • volar

    😉 nice, love your thoughts on the data.

    Responses to your inquiries (for benefits to readers):

    I think mole interpreted the charts the same way as me.. certainly little edge in shorting the market. More of an edge on when to go long.

    As for the June performance history, I simply highlighted the periods to see how many times June could go negative. Little usefulness, justs puts things into perspective (aka this is the longest consecutive poor June months i have since 1950)

    As for “skew” i am using, =skew(xxx) in excel. That function is used to determine which way the tail lies.  As mole knows (but for the benefit of the readers) % positive does not mean it is a great idea. % positive referes to the mean(average) while skew is looking to determine if there is a large event (aka kurtosis/fat tail/ large move) what side of the tail does it lie on… I use that for trend trading, bc, trend trading needs tails to work not % winners. Mole knows much about this and may be able to explain it better than I. My point is that DEC and JAN can have large up moves, and have a higher % positive move (aka quite reliable bet). The sharpe ratio jives with that as well.

    As for the CBOE, yes, it is Call/Puts to mirror the S&P. Good call to not confuse rats 😉

    As for charting software that indexes data seasonly, ProphetX does that, but it takes a little work.

    Great post mole! This is a great place to fall back when one has seasonality questions IMO

  • http://thebhbgroup.com TheBHBgroup

    Thanks Mole…going to take my time and bookmark this post and spend some time diving into the details of this one.  There’s a lot of useful info for a trader to use here for a macro view of the markets.  The seasonality of the markets and the almost typical market addages have been working like clockwork this year from my own study of the markets.  The sell in May and go away…the xmas rally…its almost too perfect but its been working well all year long….especially in commods like precious metals and grains!

  • Anonymous

    Outstanding work Mole and Volar!

    I got it bookmarked already after checking the 2nd chart.
    Will help me for sure in avoiding a number of bad trades in the future.

    Well, I am ready for an above average bloody June.

  • http://evilspeculator.com molecool

    And most handsome!

  • raised_by_wolves

    @molecool:disqus @volar:disqus So, while seasonality gives an edge to going long March, April, July, October, November, December, and January, it doesn’t give an edge to shorting the market during the other months . . . unless . . . one did a pair trade with something that has seasonality that gives an edge to going long February, May, June, August, and/or September.

  • Anonymous

    Just a heads up – it looks as if the zerofx is stuck.

  • raised_by_wolves

    @molecool:disqus @Gerbil_Gold:disqus Gold Gerb looks good . . . to eat!

  • Anonymous

    “quite frankly this quality of analysis is usually not available to retail traders and institutions pay thousands of Dollars for this type of data”

    I couldnt agree more. This area is a big hole in my game, and I intend to fill it properly :-)

    Thanks Volar

  • Anonymous

    outstanding post. that took a week to prepare and it will take me an hour to study it.

    FWIW (probably nothing), here’s the BDI chart – lowest since the 2008 crash:

    http://investmenttools.com/futures/bdi_baltic_dry_index.htm

    Pay attention to the “logarithmic SP500 : BDI chart”, and huge divergence between the two in the last half a year, not seen before.

  • http://evilspeculator.com molecool

    Was resetting it.

  • Anonymous

    ks. The blue spikes that were there are now gone. Does that happen when it’s reset?

  • Anonymous

    That should have been “thanks”, not “ks”.

  • http://twitter.com/Scrillhound Scrillhound

    We’re pretty close to some previous monthly lows on both SPX/ ES (Feb/ Apr). /NQ, also. Some good levels to watch for both sides

  • Anonymous

    There is a developing situation in silver, another potential small range high reward trade.

    What happened is that silver broke to the upside from its daily hammer candle, and retested the breakout point. Thats perfectly normal for bullish price action, but its not behaving quite right.

    What *should* happen after a test of the lows is a quick shoot to new highs and beyond. 

    It still could do that, but IF IF IF the breakout fails, odds are the  larger scale bearish trend takes over. And after a 50% retracement of the falls, and 2 days of corrective, that should be a substantial leg to the downside.

    Retest variation sell pattern

    Wait until the next 60 min rollover in 20 mins if you plan on taking the trade. 42 pips of risk on the trade

    http://evilspeculator.com/wp-content/uploads/2011/06/6-june-silver-60.png

  • volar

    only real EDGE i could find is to go long in MAR, APR, NOV, DEC. 

    JAN and JULY an OCT are OK, but bull months in a bull market, bears in a bear.

    the only other edge may be to lean to the short side in SEP, but only if you are in a *bear* market.

    so sell in MAY means take profit in MAY, not go short, i may add

  • raised_by_wolves

    In my way of thinking, one should only consider going long SPX during March, April, November, and December then since that is when there is an edge. If it’s a bull market during Janurary, July, or October, one should be long something else that has an edge. There must be something that has an edge during June. We know SPX sure doesn’t, but there must be something else. Can we make a calendar of what has an edge when? For instance, when does wheat have an edge? When does copper? Oil? Treasuries? Gold? Silver? If we can make a calendar and organize it by performance, then the idea is to go long the asset that has the greatest edge for a given month and short the asset that has the least edge for a given month.

  • volar
  • bisq

    Great work.
    Have a quick question , anyone know where i can find NYSE tickers for things like currency pairs? Do structured products exist like that as equity listings?

  • volar

    Also for more clarification a seasonality edge does not mean that one can not make $$$ doing something else.

    EG just bc my seasonality data says there is no LONG edge in JUN, that does not mean going long or short does not make money. It means there is no probability of using SEASONALITY to make positive returns..

    just for clarification…

  • Anonymous

    DZ ? – After Thurs the line was positive and we were all saying WTF.  Now after Fri got added in it all looks pretty normal.  I expected to still see positive signal w/ maybe a slight pullback.  Mole can you explain?  Thanks and thanks for the post.  I did bookmark it.  Great stuff.

  • http://practicalt.blogspot.com/ Gold_Gerb

    All inside candles on the weekly.
    http://stockcharts.com/h-sc/ui?s=SLV&p=W&yr=0&mn=9&dy=0&id=p84587510161
    young whippersnapper.
    😉

  • Anonymous

    When you say “new highs”, do you mean north of 49, or north of the most recent high, 37+?

  • nyse

    Thanks for sharing this, Volar. This is really great information. 

  • nyse

    What does that mean? What is one supposed to gather from that. TIA

  • Anonymous

    Mole and Volar, great job with your Charts Illustrating Seasonality.

    These data reiterate what those of us that are bears at heart should have already known.  And that is to Trade with a Bearish Bias 24/7 each and every trading day, week after week, month after month is a recipe for Total Disaster.  IMO, the market rightly or wrongly has always been a “Pie in the Sky”, “Pollyanna” Institution.   If it wasn’t, why would people put money into it in the first place?  

    I realize that for some of us it can be difficult to go long the market when you know that it’s all based on bullshit.  However, I believe that what I’ve learned is that even though the market is based on sentiment that doesn’t have to be based in reality, the end result of the tape is real.  

    As a matter of fact, all Swimming Upstream has done for me is to allow me to hear the “Giant Sucking Sound” that was made as dollars were vacuumed from my account.  This phenomena became especially true while chasing P3 through various strong seasons of the market.   After this fiasco, I feel fortunate just to still be in the game.

    Having said all that, I remain currently net short.  Not because of P3 (although that would be nice) :) but because my rules tell me to do so.   As we are in the month of June, seasonality could be on my side as well.  

    However, if the current market situation were to change, the major difference for me is that I will change with it.  This is because it has been proven to me beyond a reasonable doubt that it is Prudent to be in Sync with the Market rather then Fight it.     

      

  • Anonymous

    Actually I was referring to the intraday high on the 60 min chart, and the trade did not trigger so disregard :)

  • Anonymous

    Be very careful with currency etfs. Because the big moves on the audjpy will happen in either australian or japan trading hours (or both) when numbers come out, you might find yourself with problems trading a NYSE hours instrument. IMO better to open up a small sized futures account (using massive margin) for your currency trades.

  • Anonymous

    Exactly so! Silver has a lot of bearish potential, but it has to break the weekly low to start getting on with it. 

    And as we know, if something which *should* happen does not, we can expect a bigger move in the opposite direction.

    Therefore if the weekly retest variation buy setup (as well as the inside week) is triggered, we can reasonably expect that to be a bigger than normally expected move, since silver looks bearish as fuck by any measure and has no business trading anywhere near its weekly highs.

  • Anonymous

    Couldnt say it any better than that :)

  • bisq

    Yhea i was thinking more like dollareuro and cable in the form of UUP.

  • volar

    i never want the market given fundamentals.

    BUT* JUST LIKE YOU SAID, “rather than fight it”

    To support that…

    (a) if the banks are going to make money going long the overvalued piece of fecal matter…. so am I.  I wont go short for no reason to let them take my coin. I will go long to take traders money any day of the week

    (b) if she did not get irrational, how would one get a chance to short the living piss out of an overvalued market?

    so bottom line,

    The more irrationality, the better IMO!

  • TWD

    There is a very large volume imbalance on the July 32 put options…

  • raised_by_wolves

    That’s my doing 😉

  • Anonymous

    Looks like a sleepy Monday but as of 12:37 PM, Declining Volume is over  Advancing Volume by the Strongest Levels of the day.  

  • volar

    i like to use the NET ### as opposed to the ratio, but that is just me 😉

  • Anonymous

    I use -$DVOL+$UVOL which I believe is a Net Result?  And as of 1:36 PM it is at a Net -2,776,290.  This is not a terribly strong number but it has been a progressively slow bleed as the day has progressed.

    I think I probably worded it wrong previously by saying over as opposed to net.  :) 

  • volar

    oh i was just saying i was reading it the same way as you… i just gave up on the ratio and stuck with the net number 😉

  • tradingmom

    We’re at the top of a channel on the 5 min zero now (2:13 eastern)

  • http://evilspeculator.com molecool

    Jezzz, it’s dead in here today…

  • http://thebhbgroup.com TheBHBgroup

    volume is dead across the board….not much to do but short all rips…which is what we r doing on our desk the past 3 weeks.  Long USD looking close to being back in favor this week.

  • Anonymous

    Yep.  And this has the potential to be an interesting close as the internals appear to be getting weaker and weaker.  

    Of course I’m always listening for the sounds of horses from the calvary.   WTF is holding the DOW up?    Could it be?    Nah.

  • http://evilspeculator.com molecool

    I have to do some work in NinjaTrader and need to turn off ZeroFX for a few hours. Just FYI. If you’re in a trade and really really need it please email me you know where.

  • Anonymous

    Care to comment on my ? about DZ bellow?

  • tradingmom

    SPX hourly has that bull wedge look to it, plus bullish divergences abound….thinking of an overnight long trade.

  • Anonymous

    Might have some Negative MO MO building right now.  Over the last hour and a half we’ve gone from Neg 2.7  in favor of Down Volume to Neg 4.32 as of 3:03 PM.  

    “It ain’t over until it’s over” though.   :) 

  • http://evilspeculator.com molecool

    I didn’t see it but think I know what you are talking about. Quite frankly I don’t have an answer right now – may have been some kind of data laps – who knows. I reloaded it several times and also cleaned out the history – no change. First time this happened and before I can offer an explanation I need to look into this. 

    Suffice to say that the current reading of course makes a LOT more sense.

  • tradingmom

    5 min zero at bottom of channel, SPX hourly has big wedge, looks like this wants to break up and out in a big way.

  • Anonymous

    We’ve broke May low. There is a gap on 3/17-18 @ 1273. Getting close?  So far the tape is running in sync with Euro.  Financial has been quietly going down…

  • Kudos

    Mole, ZeroFX is frozen. Please update! —– edit: Didn’t see your post. NM don’t need it that much. Please post if you see a 3-4 sigma event

  • Anonymous

    OK, seeing as how my Dashboard doesn’t work anymore and I haven’t been getting replies to my posts via E-Mail for a couple of months now, I just tried tweaking my Disqus Account one more time and I’ll probably end up regretting it. 

    But, would someone reply to this message to see if I get the reply via E-mail?  

    Thanks 

  • tradingmom

    Isn’t disqus grand?

  • Anonymous

    Thank you TM.   

    It came through as Spam but at least it came through. Before I had the problem, it was “normal” for some messages to come straight to my Inbox and some would come through as Spam.   Then for the past couple of months I wouldn’t get any replies at all.  So it might actually be working now.

    RBW, I know you’ve had the same problem.   I’ll wait to see when you are on-line and talk about what I believe could be the fix at least for part of this mess.      :) 

  • Anonymous

    Thats the one I use, when you plot it on a chart it makes for interesting stuff. Though I’m with Volar I like the straight number for breadth $add.

  • Anonymous

    Interesting ZL AH numbers…

  • http://chartsandthat.blogspot.com/ ultra

    NZDUSD weekly

    http://content.screencast.com/users/ultrabear/folders/Jing/media/25f1b32c-45c4-4974-a4a9-5f6f83afbb7b/NZDUSD_weekly_2011-06-06_2246.png

    // last week’s candle is obviously a shooting star, not a hammer – it’s past my bed time…

  • Anonymous

    I was going to do a post but I’m too tired…. here is the summary version. All trades enter at daily low/highs, with a stop at the opposite.

    Gold is a GREAT fakeout sell (with shooting star, at top of bollinger)
    AUDJPY is a good looking inside day both long and short (short its also a retest variation, long its also a fakeout inside day)
    NZDUSD is a retest variation sell and inside day, id take it both long and short unbiased.

  • http://evilspeculator.com molecool

    That was a bang on short trade a few days ago – unfortunately I missed it in the shuffle.

  • http://chartsandthat.blogspot.com/ ultra

    not too late – inside period today… inside-outside-inside in fact

  • Anonymous

    Dr Copper certainly looks weak too

  • bisq

    And FCX closed negative despite the Goldmans upgrade.  Theres an easy sell set-up if i ever i saw one.  As for gold , the long GLD short SPY trade has paid off handsomly the last few weeks. I dont see why its not going to remain a winning pairs trade : Euro worries wont punish gold as hard as they will punish stocks (especially bank stocks , look at XLF)

  • Anonymous

    Its also a retest variation sell on break of the low

  • Anonymous

    Personally, I don’t want to touch commodities right now, especially precious metals. I want to see how this correction pans out before committing to it again.

  • Anonymous

    NFLX, this SOB finally looks ripe for a short. There’s a large distribution candle today:

    http://www.uploadgeek.com/share-FCFD_4DED3F41.html

  • http://evilspeculator.com molecool

    ¤ø„¸¸„ø¤º°¨¤ø„¸¸„ø¤º°¨ 
    ¨°º¤ø„¸  N E W  „ø¤º°¨ 
    ¸„ø¤º°¨ P O S T “°º¤ø„¸
    ¸„ø¤º°¨¤ø„¸¸„ø¤º°º¤ø„¸

  • http://evilspeculator.com molecool

    Well, everyone has their system, as you know.

  • bisq

    I hear you , that means dollar long. However, im not talking being long gold naked , its a pairs trade. And the long term trend of that trade is still very much intact (im talking monthly-yearly) Also remember this : copper , oil , silver etc are all industrial commodities that a double-dip and deflation will decimate but gold has no real use except as a monetary unit : the very thing Wall St stock pumpers criticize it for (including Messrs Buffet and Munger) ie IT DOESNT DO ANYTHING! are the reasons to be so confident in it as a store of value , its just money. Its perceieved weakness is its strength.   My humble opinion is just not to get too gung-ho shorting it in , theres plenty else out there (including silver , which is industrial and not a serious way to store wealth)

  • Andrew Kozak

    High is low and low is too high. The world is ending again.