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14 May 2016

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First thing I analyze when I am creating my daily automated program may be the current market classification.


The reason why? Because, depending on which scholar you read, the marketplace itself contributes around 50% with the return of individual stock gains/losses. It's wise to me then that the most significant single factor ought to be the beginning to analyze.


Should you only get one thing right, it ought to be the present market condition.


I examine market symptom in 2 time dimensions: Long lasting and Intermediate term. The time periods I decided are specific for the way I trade and also the typical cycles I look to hold individual positions. I believe that your time frame should affect how you look in the market. I really believe one size fits all strategies are not well suited for individual success. Therefore, I consider long-term to be the last 180 days and short term to be the last Ten days.


I look at long-term market symptom in 2 dimensions: Price level and Relative Volatility. Without starting the specific techniques I take advantage of to classify individual states, the reality is that I have 3 price categories: Bull-Sideways-Bear, about three volatility conditions: Quiet-Normal-Volatile. This results in a 3�3 matrix, with 9 possible market condition states. (See table below)


Looking back in the last 13 many years of S&P 500 price data (that's as long as the S&P ETF: SPY, has price data available), I analyzed the information from the returns of the marketplace for the very next day in line with the market condition as defined, and figured that there have been distinct variations in the results for every of the 9 states. Apparently there are just 4 of the 9 states where, typically these days return is positive.


It is really an extraordinarily important bit of information to understand when looking at trading opportunities for an additional day, particularly when your trading instrument or "target" is strongly correlated for the US large cap market. The look here is an illustration of this the market classification matrix in action. It should not surprise you to view the marketplace is currently (at the time of Oct 4, 2008) in Bear Volatile: the worst condition for expected returns.


What's important to note is that my analysis model classified the marketplace as Bear Volatile on Sept 9, and it has remained there ever since. Industry is down more than 10% in that time frame. It's over 20% since entering Bear Quiet mode on June 03, 2008. Being aware of market condition can prevent those types of losses from occurring and add tremendous value and insight to any long-term investment program along with inform short term trading strategies.

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