Chapter 1

• Backtest done from 1989 – 2003 for the first edition, and updated to 2011 for the second
• Buying short term weakness has outperformed buying short term strength over the past 15 years

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

• Benchmark:
  • The author looked at S&P500 from Jan 1, 1989 through Sep 30, 2011.
  • Found that SP had gained an average of 0.03% per day and an average of 0.15% per week for the 22+ year period

Average one week gain (%) for S&P after it makes a

	High	Low
5 day	-0.02	0.43
10 day	-0.03	0.51

Average one week gain (%) for Nasdaq after it makes a

	High	Low
5 day	0.08	0.57
10 day	0.20	0.74

Chapter 3: Higher Highs and Lower Lows

Average one week gain (%) for S&P after it makes n consecutive

	Higher High	Lower Low
n = 3	-0.04	0.49
n = 4	-0.09	0.50

Average one week gain (%) for Nasdaq after it makes n consecutive

	Higher High	Lower Low
n = 3	0.05	0.70
n = 4	0.01	0.81

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

Average one week gain (%) for S&P after it makes at least n consecutive

	Up Days	Down Day
n = 1	0.06	0.27
n = 2	0.01	0.41
n = 3	-0.01	0.64

Average one week gain (%) for Nasdaq after it makes at least n consecutive

	Up Days	Down Day
n = 1	0.23	0.36
n = 2	0.20	0.59
n = 3	0.22	0.85

Chapter 5: Market Breadth

Average one week gain (%) for S&P when NYSE

	advancers ≥ n*decliners (for m days in a row)	decliners ≥ n*advancers (for m days in a row)
n = 2, m = 1	-0.09	0.45
n = 3, m = 1	-0.23	0.62
n = 1, m = 2	-0.01	0.31
n = 1, m = 3	-0.06	0.46

Chapter 6: Volume

Mixed results, no conclusive findings (regardless of whether the large volume day is an up or down day)

Chapter 7: Large Moves

Average one week gain (%) for S&P after it

	rises n% for the day	falls n% for the day
n = 1	0.04	0.43
n = 2	-0.04	0.72

Average one week gain (%) for Nasdaq after it

	rises n% for the day	falls n% for the day
n = 1	0.12	0.62
n = 2	0.02	0.78

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

• The HILO index is a daily number that subtracts the number of new 52-week lows for the day from the number of new 52-week highs for the day

Average one week gain (%) for S&P after the NYSE HILO makes a

	n-week high	n-week low
n = 1	0.02	0.27
n = 5	-0.05	0.43

Average one week gain (%) for Nasdaq after the NYSE HILO makes a

	n-week high	n-week low
n = 1	0.14	0.29

Chapter 9: Put/Call Ratio

• The put/call ratio is the total number of puts divided by the total number of calls for all index and equity options traded on the CBOE.
• It is widely assumed to act as a contrary indicator, with low readings (lots of call buying or little put buying) indicating confidence in the marketplace.
• Results find no extremely large historical edges using the ratio.
  • When the ratio makes a 5-day low or 10-day low, the S&P500 and Nasdaq 100 both underperformed or equaled the benchmark (refer to the benchmark mentioned in Chapter 2)
  • There does not seem to be much of an edge when the ratio made a 5-day high or a 10-day high

Chapter 10: Volatility Index (VIX)

• The CBOE VIX is a measurement of the implied volatility of the S&P500 options.
• It measures market sentiment and is used by professional traders to gauge the amount of fear and complacency in the marketplace.
  • High VIX reading indicate fear and are usually accompanied by a market that has recently declined.
  • Low VIX reading are usually accompanied by a market that has recently risen.

Average one week gain (%) for S&P after the VIX closes at least

	n% below its MA(10)	n% above its MA(10)
n = 5	-0.06	0.4
n = 10	-0.13	0.52
n = 15	-0.74	0.72

Average one week gain (%) for Nasdaq after the VXN closes at least

	n% below its MA(10)	n% above its MA(10)
n = 5	-0.12	0.12
n = 10	-0.53	0.16
n = 15	-1.09	0.37

Chapter 11: The Two-Period RSI Indicator

• The historical edges for RSI(2) is the largest in the book
• Findings
  • Low RSI levels (especially below 2) have led to significant outperformance in the S&P.
  • High RSI levels have not performed well
  • Extreme low RSI levels when it is below the 200-day MA have seen healthy short terms gains
  • The Nasdaq has seen a larger than normal gain on both sides of the extremes with the greatest edges coming when the RSI is at its lowest levels.

Chapter 12: Historical Volatility

• Historical volatility is the realized volatility of a financial instrument over a given time period.
  • It is generally calculated by determining the average deviation from the average price of a financial instrument in the given time period
  • standard deviation is the most common way to calculate historical volatility
• Steps the author performed for the tests:
  • look at all stocks above $5 per share whose average daily volume ≥ 250k shares.
    • includes all delisted stocks
  • separate the entire stock universe equally into 5 equal buckets ranked by their 100-day HV (i.e. each bucket consists of 20% of the stocks, with bucket 1 containing stocks with the lowest HV)
  • look at every 252 trading days return for each stock since 1995

Bucket	% Return 252 Trading Days	% Winners	Avg % Loss of Losing Trades
1	9.7	66	-19.8
2	10.3	61.1	-25.2
3	10.6	56.7	-30.9
4	9.8	51.1	-37.4
5	5.4	44.2	-44.4

Chapter 13: Creating a Sample Strategy from This Research

AFL: https://smarttradingstrategies.com/systems/#How_Markets_Really_Work_Sample_Strategy_by_Larry_Connors

Rules

• All stocks in the S&P500 index universe from Jan 1, 2001 to Sep 30, 2011 were included. Dividends, splits, buyouts and so on were included in the test results
• Simulated trades were done once a week each Friday on the close
• S&P ≥ MA(200) on the trade day
• Stock ≥ MA(200)
• Stock is down 2 days in a row (yesterday and today)
• RSI < 15
• 100-day HV < 35
• On the close on Friday, buy up to 10% per position with up to 10 total positions. If more than 10 stocks qualify, take the ones that have the highest 100-day HV (short term we want these stocks to have the ability to move)
• Exit the next Friday on the close and rotate into the next round of 10 S&P 500 stocks

Results

• There were only two small down years
• no one year is out of the ordinary (consistent)
• 2008 was a positive performing year

	Strategy	S&P 500
CAGR	10.48	0.04
Max DD Daily	-14.98	-55.25
Sharpe Ratio	0.81	-0.03
Correlation to SP500	0.41

Shortcomings

• Can be difficult for stocks to be filled on Friday’s close → high slippage
  • The strategy can be traded on all days of the week, holding the positions one week