Simple "minor bottom" signal

To follow up to Rayvt’s “what a day” the simple bottom detector signaled a “minor bottom”.

Despite the market in total being up, a significant percentage of traded NYSE stocks (22.3%) set new lows. As there were not many new highs (0.6% of traded stocks) this drove the bottom signal.

An interesting day for sure.

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My short term bottom detector triggered Thursday. S&P close 4,288.70
Last signals were Jan 27 and 28.
It usually presages good returns on the one month time frame. On average.

But it was a reasonably emphatic signal. The last time it triggered more strongly was 2020-03-23.

The major bottom detector hasn’t triggered.
But it is closer to triggering than it has been at any time since 2020-04-03.

Jim

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It usually presages good returns on the one month time frame. On average.

I didn’t have the guts to act upon it, but in premarket trading yesterday the NAS100 futures were down 2.7%. QQQ ended the day up 3.35%. That means that in one sense, the market has already rallied 6% from the minor bottom signals.

2/24/22 QQQ
O - 318.84
C - 340.49
Close/Open Spread - 6.79%

H - 341.04
L - 318.26
H/L spread - 7.16%

It’s been since March 20,2020 since QQQ has had a candlestick that wide. (That day was a solid candle stick though.)
https://stockcharts.com/h-sc/ui?s=QQQ&p=D&st=2020-02…

So, have we already had our “good returns”, and it’s not worth pursuing any longer this go-around?

Tails

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Hi Jim,
Do you detail your major bottom trigger indicators/criteria anywhere?

Following one macro guy on twitter that seems fairly legit and has been in cash since Nov awaiting this correction to play out:
https://twitter.com/Norseman1/status/1497025950650880002?s=2…

In general, he is referencing Dec 2018 as an analog to what is expected now.
Some of the signals he likes are:

  1. 5 straight down days in Indexes. (if yesterday had finished red, it would have been #5, so that failed)
  2. 90% DVOL day in the period. denotes capitulation, I guess.

I know this stuff is more art than science likely, but was just curious what indicators are common and shared among the people I am following who pay attention to this sort of thing.

Dreamer

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So, have we already had our “good returns”, and it’s not worth pursuing any longer this go-around?

Probably still not too bad.
Look on the bright side: you already know the market is bouncing (for now) rather than continuing to plunge, which seemed eminently possible mid day yesterday.

I measure the historical results from my bottom detector signals using the next day’s open of the S&P.
At any bottom, the intraday low point is going to be a lot lower than when you get in.

From the next day’s open, nominal S&P index return:
Average return in the next month is +2.1% (CAGR 28)
Median return in the next month is +2.2% (CAGR 30)

Results are generally good in the 1-4 week “bounce” range.
Only very faintly above average at the 3-6 month mark.

For a lasting signal I need to get a peep out of the “major bottom detector”.
It has been silent since the stretch ending 2020-03-23 when it triggered four days out of five.
Prior signal was the four trading days in a row ending 2018-12-26

Jim

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What comes to my mind emphatically with the market’s behavior in the last two days is -
“Sell on the rumor, buy on the news.”

In contrast to Feb-Mar 2020 when I sold everything and took a big hit, this time I’m sitting on my hands. So far so good. I even rolled over some of my option portfolio on Tuesday, which meant reducing the cash allocation a little.

Elan

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Is today the end of the bounce from the minor bottom signal on 2/25/2022?

Is today the end of the bounce from the minor bottom signal on 2/25/2022?

I think that’s perhaps giving it too much credit.
It’s usually good for 1-4 weeks.
In this case, I think it had no meaning past the March 3 mini-top.

But, look on the bright side.
A brand new rally! Starting at the March 11 lows.

If you’ve been in the markets for a lot of years, it’s hard not to read meaning into the market behaviour. (it will be wrong, but you do it anyway)
Divergence, huge bounces, a narrowing market and terrible breadth. Many new highs AND new lows.
At the very end of a long bull, you see a lot of people who have endured Pavlovian training to buy on dips.
But eventually, eventually, they learn that the market can do other things.
Obviously I have no real idea what will happen next, but this rally feels like it has a hint of desperation and denial to it.

My wild speculation is that some time in the next few months we will see market movements consistent with a large number of forced sellers.
I’m not betting on that, but I think I’ll be prepared for it.

Jim

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