A Quant’s Eye View of Six Months From Now…

A few years ago, I found myself driving onto the grounds of a posh private Long Island golf and tennis club to meet one of my hedge fund business partners and a new outsider. The new guy was a quantitative analyst (or “quant” for short) who did deep dives into market data to find actionable patterns.

In our hedge fund, we had been following his work for a while and had grown interested enough to see if he could do some contract work for the fund – or maybe even join the team if the fit was right.

This was only six years ago, so you can understand my surprise and amusement when he whipped out his programming notes to show that he was using the Fortran language – which is a throwback to the 1980s. It was the first programming language I used as a freshman engineering student (programming it on punch cards!), so this quant was really rockin’ it old school…

But the results of his aged programming and huge statistics database were pretty cool and quite useful. He didn’t end up working for the fund, though we did contract some analysis from him for many years.

I still check in on his work from time-to-time, and was not surprised to see some insightful data that he churned out about current market conditions. In fact, he’s identified a pattern that’s so rare that it’s only happened 33 times since 1950.

Let’s dig in…

The pattern that our friendly neighborhood quant found is a monthly price pattern in the S&P 500. You can see it on this chart:

You can see four consecutive up months followed by a down month. That fifth month’s slump is to be expected – after a strong move in the market like four straight up months, it’s normal to get some profit-taking and a pullback month. What is not so usual is for the sixth month of this pattern to be another up month. As I said before, that’s only happened 33 times in the last 70 years.

The thought process here is that when the first down month after a string of winning months doesn’t lead to more downside, the uptrend has a firm foundation to continue.

My quant friend provided this data:

  • In the prior 33 occurences, the market was down six months later only 6 times, giving an 82% rate of positive follow through.
  • More impressively, the average gain was +8.7% six months later vs. an average loss of only -2% when the pattern didn’t work out.
  • Most impressively, when the pattern didn’t work out, the average loss six months later was smaller than 2% in five out six occurrences, while gains of 2% or more happened a whopping 25 out of 27 times.
  • This means that this pattern has led to outsized moves (more than 2% either direction) by an amazing margin of 25 to 1.

While this doesn’t mean you should go out and bet the farm on what’s going to happen in the next six months, it does give us some additional quantitative support for a continued bullish price expectation in the broader market.

And if you think that sort of success from identifying patterns is incredible, wait until you see this…

Tom Gentile and his team of data scientists have spent many months identifying, testing, and perfecting a unique pattern – an anomaly, really – HIDDEN in the trading frenzy of the market.

When you spot this anomaly and you tap into it in just the right way, it’s possible to shear big chunks of cash – $15,000… $20,000… even $30,000 a month – right off the top of the market. Take a look now – before the crowd rushes in…

Be sure to catch the Weekend Market Update video tomorrow, where I’ll give you three more reasons to be bullish on this market right now.

Great trading and God bless you,

D.R. Barton, Jr.

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