mindmoneymarkets

The Rolling Sortinos

In a recent post I previewed a neat service coming soon from my colleague Jeff Pietsch that ranks various indicators by their rolling 252 period Sortino ratio.

I raised the possibility of being able use these rolling Sortinos to switch between systems or manage position size.

It’s taken a while to get the models built but they are showing some initial promise.

The Rolling Sortinos

Despite sounding like a travelling circus act, this metric does appear to have some use as a filtering tool.

What's working right now?

There's no doubt markets are behaving in a different than they have in recent history. Some short term indicators like the DVB have fallen out of sync with markets. While there are some ways to filter and adjust to market conditions to turn off certain inputs, it’s useful to know what is actually working right now.

Luckily I’m privy to a great tool my colleague Jeff Pietsch has in beta right now. A performance matrix displays various indicators across different ETFS via 252 period Sortino ratio. It’s a very neat, visual way to see what is working on which market.

Here’s a sneak preview:

As you might have guessed, the shortest of the short term indicators have not been doing well, but looking a bit further out (DVI, DVIM etc), markets are still mean reverting – It’s just not the sort of mean reversion that the likes of the DVB thrives on though.

The longer term DVI, DVIM and DVIS have fared better on the main markets of late, but the real star has been the Livermore Trend Indicator which has shone while the DVB has faltered. All of these indicators are available within the DV Indicators package, a product I must disclose I am involved in.

The simple solution would therefore be to switch your attention to what is working and step away from what isn’t. But we all know this is incredibly easy to do with the benefit of hindsight, but rather more difficult in reality.

In the next few weeks I’ll be running a test of a 252 period Sortino rank method for indicator switching and will report back when I can on this rather mammoth undertaking.

One solution going forward might be to hedge bets by averaging indicator signals across fast and slow indicators with the addition of a trend indicator (Livermore Trend Indicator) as a final overlay.

Inputs:

• Fast: DVB (DV2 period)
• Fast: DV3 Period
• Slow: DVI (Intermediate)
• Slow: DVIM (Intermediate Magnitude)
• Trend: Livermore trend indicator

Buy on score below 0.5 sell on score above 0.5

Returns:

This still of course comes with a huge dollop of hindsight in the selection of the indicators to throw into the averages. Still it gives you an idea of what is working right at present.

Now where’s that time machine…

Days since 200 day highs

I found a recent post by Woodshedder on the behaviour of markets after 200 day highs and 200 day low absolutely fascinating. Well worth a read. 

I was interested in this conclusion: 

"The market making new 200 day highs is carried by its own momentum. The momentum allows the market to shrug off bad data and investor fear and uncertainty."

It got me thinking...could this provide some sort of long term trend filter?

It seems so.

Equity curve surfing & other filters

Following my last post on the struggles the DVB indicator is having, a reader reminded me of this excellent post Jeff Pietsch's market rewind blog. 

Worth a read certainly. The main highlights from this post for me are these three suggestions: 

1. Know what environment you are trading in (reverting/ trending).

2. Trading methods themselves revert (addition by David V.).

3. Track your methodology's equity curve like it was a stock.

In the context of the current market, I thought it would be a good idea to put some flesh on these ideas applied to the DVB Indicator. 

When does oversold become a sell signal?

My favourite short term indicator the DVB is not having a happy time of it, doggedly signalling long, but the market has been stubbornly refusing to listen.

Trading the indicator via the basic method of long below 0.5 and short above 0.5 is still up 6.14% for the last 250 days on the SPY, as the equity curve below shows, it has fallen from grace somewhat.

Dow Losing Run - Quick Stats

The Dow is on course of its 7th losing day.

Going back to 1990 there have been just five seven day losing runs and just two eight day losing runs (October 2008 and September 2001). 

Average returns following a 7 day run are skewed by the 11% return on the 13th of October 2008 following the last 8 day run. 

Measuring Indicator volatility instead of market volatility

Question – Can you use volatility In DVB scores to modulate the indicators usage?

Historically, mean reversion type indicators have performed better in volatile conditions compared to trend following conditions (when the price does not pull back). Instead of using the market as a measure of volatility, can you use the indicator values themselves as a volatility proxy?

Normalised Volume

I’ve never been able to get much out of volume analysis, but then again I’ve not really given it too much serious attention. Logically, if the size of up days and down days has some predictive ability, the volume behind such moves must glean some important data?

There are a gazillion ways that volume could be examined, but I have chosen to take a look at the predictive ability of volume when used in combination with my favourite weapon of choice, the DVB. Specifically I wanted to look at returns from normalised volume moves.

DVB Through the crisis

I've been out of action trading wise for the last month. I got married at the start of the month and enjoyed an active yet refreshing honeymoon in Peru for 3 weeks (We're not beach people!). 

Even in the Peruvian Andes I couldn't fail to miss the headlines from Greece and the ensuing market volatility. 

It looked good time for Mean Reversion type strategies which is typical when you’re aware from your screen. So I was keen to find out how a basic DVB strategy would have fared recently.

The basic strategy is to go long on a reading below 0.5 and short on a reading above 0.5.

Here’s how things have panned out recently using this method on the SPY (S&P 500 ETF). 

Not too shabby based on a rather simplistic eyeballing of the charts. 

 

DVB & TSI Ranking Part II

Following on from my last post looking at TSI rankings to choose the market to trade DVB, I thought I'd follow up on a couple of the ideas mooted in my last post. 

The general idea is to trade the DVB on the market with the highest TSI score (Between SPY, QQQ and IWM).

I noted that the market with the highest TSI tended to have the best returns on the long trades (as you might expect). Following a similar theme, when the IWM (Russell 2000) had the highest TSI, short trades as a whole under performed, especially on the IWM. 

So I looked at a hedge on short trades when the IWM was top. The theory runs that if the IWM has the