I used a breadth indicator, since we think we are smart if we obsess about breadth, "S&P 500: percentage of stocks above 5-day moving average," and an insanely low percentage of 5, which is where we are (4.40) according to their site. I used crossing below that percentage rather than above, since we like to catch knives as it's happening.
Conclusions:
Hold time is almost directly proportional to your chance of realizing a profit. Ie.,
Over the last 3 years, there have been 24 observations where the % of S&P 500 Stocks Above 5-Day Moving Average crossed below the level of 5.
After 1 day, the S&P 500 returned an average of 0.01%, with the return being negative in 63% of the observations.
Over 3 years, the total return was 0.17%, while the passive return for the S&P 500 was 37.16%.
Well that sucks, better increase my hold time. Let's double it.
Over the last 3 years, there have been 22 independent observations where the % of S&P 500 Stocks Above 5-Day Moving Average crossed below the level of 5.
After 3 days, the S&P 500 returned an average of 0.81%, with the return being positive in 64% of the observations.
During the 3 days:
Positive returns occured in 68% of the observations. The highest average return of 1.60% occurred after an average of 2.00 days.
Negative returns occured in 64% of the observations. The lowest average return of -0.57% occurred after an average of 1.68 days.
Over 3 years, the total return was 17.72%, while the passive return for the S&P 500 was 37.16%.
Well that still sucks, but 3:2 odds, hey, ok, let's gamble. Where's my stop?
Hey wait - I'm rich and well-capitalized. Screw stops. What if it keeps happening and I just keep buying every time? (their thing allows you to have "overlapping observations," that is, we'll keep frakkin' buying every time this happens and increase our hold time Martingale style! Yeah!
Over the last 3 years, there have been 22 observations where the % of S&P 500 Stocks Above 5-Day Moving Average crossed below the level of 5.
After 60 days, the S&P 500 returned an average of 6.05%, with the return being positive in 77% of the observations.
During the 60 days:
Positive returns occured in 95% of the observations. The highest average return of 9.15% occurred after an average of 41.27 days.
Negative returns occured in 91% of the observations. The lowest average return of -5.67% occurred after an average of 20.05 days.
Over 3 years, the total return was 133.07%, while the passive return for the S&P 500 was 37.16%.
Oh, that sounds great....Wait, what's my drawdown?
And what's if it's 2008?
I am long because I like the odds, am rich and well-capitalized, use risk management, and don't think it's 2008. Whether you think this crisis is a political one (my opinion) or a purely fiscal one (as it was in 2008 - the government could not move fast enough to save the banks and prevent the recession). That's the difference between a cascade and a major, major dip on a 3-month time frame.
Edited by sluzbenik1, 02 June 2012 - 09:51 PM.
