Churn Continues. Positive Bias Remains.
Dr. Duru | Apr 07, 2013 02:42AM ET
: 48.0%
VIX Status: 13.9
General (Short-term) Trading Call: Hold
Commentary
As luck would have it, the SSO put I bought on Thursday to play the T2108 Model tripled in value when I sold it in the wake of Friday’s opening sell-off. The S&P 500 trembled as U.S. unemployment numbers were much worse than expected. However, after the index tagged its lower-Bollinger Band®, I realized the action set up a fresh buying opportunity. I am now long the ProShares Ultra S&P 500 ETF (SSO) calls.
Those calls increased in value over 30% by the close as the S&P 500, almost predictably, bounced off the lower-BB. After it is all said and done, the S&P 500 has still gone nowhere for a month.
The opening excitement drove the VIX right to its 200DMA and just above the all-important resistance/support level of 15.3. Again, almost predictably, the VIX soon faded from these resistance levels and closed right where it closed the previous day. This action sets up a likely positive day on Monday where I will most likely sell my SSO calls.
T2108 dropped just slightly to 48.0%. It first dropped below 50% two days ago. The S&P 500′s performance since then is exactly 0%. This is important because my T2108 model suggests the S&P 500 will have a positive bias until this “under period” lasts about 30 days.
The chart below shows historical performance of the S&P 500 from the first day T2108 closes below 50% to the first day it rises above 50%. The blue dots show actual performance. The red dots show the predicted performance (using Support Vector Machines {SVM} with a radial projection for you data mining/machine learning types). The x-axis measures how long (the duration) T2108 remains below the 50% threshold.
What this chart does not show is the range of expected performance WHILE T2108 makes it way above the 50% threshold again. Making the drawdown risks explicit is one of the many to-dos ahead of me before I fully publish my results of the T2108 overhaul.
Get The News You Want
Note well that being able to examine S&P 500 behavior above and below ANY threshold is one of the several improvements I have made. This rethink is part of what makes the concepts of overbought and oversold a lot more squishy and a little less relevant to the overall analytic framework. Stay tuned for more.
Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)
Be careful out there!
Disclosure: long VXX shares and puts; long SSO calls
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