How Markets Really Work E-Book

Larry Connors

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Bloomberg Professional
• Sprache: Englisch

Seitenzahl: 81

Veröffentlichungsjahr: 2012

Beschreibung

For years, traders and investors have been using unproven assumptions about popular patterns such as breakouts, momentum, new highs, new lows, market breadth, put/call ratios and more without knowing if there is a statistical edge.

Common wisdom holds that the stock markets are ever changing. But, as it turns out, common wisdom can be wrong. Offering a comprehensive look back at the way the markets have acted over the last two decades, How Markets Really Work: A Quantitative Guide to Stock Market Behavior, Second Edition shows that nothing has changed, that the markets behave the same way today as they have in years past, and that understanding this puts you in a prime position to profit. Written by two top financial experts and filled with charts and graphs that illustrate the market concepts they develop, the book takes a sometimes contrarian view of everything from market edges to historical volatility, and from volume to put/call ratio, giving you all that you need to truly understand how the markets function. Fully revised and updated, How Markets Really Work, Second Edition takes a level-headed, data-driven look at the markets to show how they function and how you can apply that information intelligently when making investment decisions.

Leseprobe

Contents

Disclaimer

Table Explanation

Acknowledgments

Chapter 1: Market Edges

What Has Changed Since We Originally Wrote This

Chapter 2: Short-Term Highs and Short-Term Lows

The Market Has Declined (on Average) Following 5- and 10-Day Highs

Returns Increased Following 5- and 10-Day Losses

New Highs Made under the 200-Day Moving Average Strongly Underperformed

Pullbacks within the Direction of the Trend Are Significant: Rallies Counter to the Trend Underperformed

Timeline Graph Performance Explanation

Summary and Conclusion

Chapter 3: Higher Highs and Lower Lows

The Market Lost Money within One Week after Three or More Consecutive Days of Higher Highs

Multiple Days of Lower Lows Outperformed the Average Daily Gain

Multiple-Day Lows Far Outperformed Multiple-Day Highs

Multiple-Day Lows in the Nasdaq Outperformed Multiple-Day Highs

Summary and Conclusion

Chapter 4: Up Days in a Row versus Down Days in a Row

Returns Increased Following Consecutive Days of Market Declines; Returns Decreased Following Consecutive Days of Market Gains

Consecutive Days of Declining Markets Far Outperformed Consecutive Days of Rising Markets

Nasdaq Mirrored S&P Results When Looking at Multiple Days Higher and Multiple Days Lower

Summary and Conclusion

Chapter 5: Market Breadth

Consecutive Days of Declining Issues Greater than Advancing Issues on the NYSE Has Led to Higher Prices Short-Term

Significant Underperformance Occurs When Advancing Issues Outnumber Declining Issues and the Market Is Trading under Its 200-Day Moving Average

Poor Breadth Days Outperformed Strong Breadth Days

Summary and Conclusion

Chapter 6: Volume

Large Volume Days Alone Are Insignificant

Summary and Conclusion

Chapter 7: Large Moves

Large Price Declines Outperform Large Price Gains

Large Declines in the Nasdaq 100 Have Been Positive

Declines above the 200-Day Moving Average Were Significant

Summary and Conclusion

Chapter 8: New 52-Week Highs, New 52-Week Lows

Summary and Conclusion

Chapter 9: Put/Call Ratio

Twenty-Day High Put/Call Ratio Moving Averages Showed Some Edges

Short-Term Lows on the Put/Call Ratio Are Followed by Market Underperformance

Conclusion and Summary

Chapter 10: Volatility Index (VIX)

When the VIX Has Closed 10 Percent or More Above Its 10-Period Moving Average, the Market Has Outperformed the Average Gains

The VIX Closing 5 Percent or More below Its 10-Period Moving Average Has Seen the Market Lose Money over the Next Week

The Nasdaq Behavior Has Approximately Mirrored the S&P 500 Behavior When the VIX Has Been Stretched

Summary and Conclusion

Chapter 11: The Two-Period RSI Indicator

Conclusion and Summary

Chapter 12: Historical Volatility

Conclusion and Summary

Chapter 13: Creating a Sample Strategy from This Research

Conclusion and Summary

Chapter 14: Applying the Information in This Book

About the Authors

Index

Since 1996, Bloomberg Press has published books for financial professionals on investing, economics, and policy affecting investors. Titles are written by leading practitioners and authorities, and have been translated into more than 20 languages.

The Bloomberg Financial Series provides both core reference knowledge and actionable information for financial professionals. The books are written by experts familiar with the work flows, challenges, and demands of investment professionals who trade the markets, manage money, and analyze investments in their capacity of growing and protecting wealth, hedging risk, and generating revenue.

For a list of available titles, please visit our website at www.wiley.com/go/bloombergpress.

Copyright © 2012 by Laurence A. Connors and Cesar Alvarez. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

First edition published by The Connors Group in 2004.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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Library of Congress Cataloging-in-Publication Data:

Connors, Laurence A.

How markets really work : a quantitative guide to stock market behavior / Laurence A. Connors, Cesar Alvarez. — Second edition.

1 online resource. — (Bloomberg financial series; 158)

Includes index.

Description based on print version record and CIP data provided by publisher; resource not viewed.

ISBN 978-1-118-16650-5 (cloth); ISBN 978-1-118-22628-5 (ebk);

ISBN 978-1-118-23945-2 (ebk); ISBN 978-1-118-26420-1 (ebk);

1. Stock exchanges—United States. I. Alvarez, Cesar, 1967– II. Title.

HG4910

332.64’2—dc23

2011050882

Disclaimer

It should not be assumed that the methods, techniques, or indicators presented in this book will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples in this book are for educational purposes only. The author, publishing firm, and any affiliates assume no responsibility for your trading results. This is not a solicitation of any order to buy or sell.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVERCOMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.

Table Explanation

Following is an explanation of each of the columns in the tables that appear at the end of Chapters 2 through 11.

1. The “Index” column indicates which market we tested, either the S&P 500 (SPX) or the Nasdaq 100 (NDX).

2. “Rule 1” describes the first rule of the test. We would take a position only if this condition occurred.

3. “Rule 2” is the second rule of the test, if applicable. If this column contains information, then both rule 1 and rule 2 must be in place to take a position. If this column is blank, then only rule 1 is needed.

4. The “Time Period” column indicates the length of a single test. “1 day” means buy today, sell tomorrow. “1 week” means buy today, exit five trading days from now.

5. The “Gain/Loss” column lists the average percentage gain or loss the market made while we were in the position with the specified rules.

6. The “# Winners” column tallies up the number of profitable tests for the given set of rules.

7. The “# Days” column tallies up the number of times that our set of rules produced a trade.

8. The “% Profitable” column is simply the number of winners divided by the total number of trades.

9. In every test we wanted to have a baseline for comparison. We called this our “Benchmark Average.” The benchmark average is the average percentage the market gained or lost during the specified time period overall length of the test interval. For instance, the average one-day gain of the S&P 500 from January 1989 to September 2011 was 0.03%.

10. The “% Profitable Benchmark” column serves as a profitability comparison between our trade signal and the typical market. It takes all market periods and calculates what percentage of them were profitable.

Acknowledgments

Special thank you to David Weilmuenster, Leigh Lommen, and Danilo Torres for their assistance in helping us with this book.

CHAPTER 1

Market Edges

The following is verbatim from the first edition of How Markets Really Work. It’s important to get a point of reference of what we wrote and saw in 2004 compared to what we see with the second edition, which was written in late 2011.

For many of us, Michael Lewis’s 1989 best-selling book Liar’s Poker was the first inside look at what day-to-day life was like at a major Wall Street trading firm. Lewis described in detail, the wheeling and dealing of some of the famous (and infamous) Wall Street titans who oversaw billions of dollars of transactions every trading day during the 1980s. The book remains a classic today but 14 years after it was published, Lewis outdid himself. In 2003, he published Moneyball: The Art of Winning an Unfair Game. The book chronicles the success of the Oakland A’s, who under the guidance of their general manager, Billy Beane, used massive amounts of statistical data to help them successfully run their ball team.