* Going back to 2006, if you bought SPY when fewer than 50% of SPX stocks were trading above their five-day moving averages, the next five trading days averaged a gain of .44%. If you bought SPY when more than 50% of SPX stocks were above their 5DMA, the next five trading sessions averaged a loss of -.08%.
* If you divide market days since 2012 into quartiles based on the aggregate put/call ratios of individual equities, the top two (highest) quartiles average next five day gains in SPY of .90% and .40%. The bottom two (lowest) quartiles have been essentially flat on a next five-day basis.
* If you bought SPY after the highest quartile of VIX days since 2012, your next five-day gain averaged +.82%. If you bought SPY after the lowest quartile of VIX days since 2012, your next five-day loss averaged -.18%.
* If you bought SPY after the highest quartile of five-day volatility periods since 2012, your next five-day gain averaged .79%. If you bought after the lowest quartile, your next five-day loss averaged -.06%.
What might account for these observations?
* One hypothesis is that a significant proportion of market participants are over-leveraged. This means that they formulate trade ideas on a longer time scale but have to manage risk on a shorter horizon. The inability of market participants to take heat that is normal for a market's present level of volatility sets up short-term trading opportunities in which overstretched long and short positions need to be unwound.
Implications:
* On the short time horizon, what matters most is not so much macroeconomic relationships or chart patterns, but the behavioral tendencies of other market participants. A great deal of the skill of reading markets consists of reading other traders.
Further Reading: A Remarkably Consistent Trading System
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