Trend Testing S&P Emini Futures Market

[jswanson 10]

Some markets exhibit trending behavior while others do not. I was wondering what would be a good way to determine if a given market exhibits trending behavior. One simple method to accomplish this is to build a simple trend following strategy and test how well it performs on the S&P vs other markets. This simple trending strategy consists of a single 50-period simple moving average (SMA) on a daily chart. To keep things simple, the system only takes long signals. It opens a new trade when price crosses above the moving average and closes that position when a daily bar closes below the SMA. I'm not attempting to create a trading system per se, but creating an indicator that measures a market's trending characteristics.

 

Daily Bars - No Commissions - No Slippage

Buy close of bar when Close > SMA(50)

Sell close of bar when Close < SMA(50)

 

Below is the equity graph created with this system on the S&P E-mini futures market from September 1997 to September 2011. As you can see the equity curve remains in negative territory and produces an overall losing strategy.

 

 

We can now run the same strategy on the Euro currency futures. Below is the equity graph on the Euro from May 2001 to September 2011. Notice anything different? The equity curve is climbing higher and higher.

 

 

By creating a simple trend following system that utilizes a 50-period moving average, I can demonstrate that the S&P E-mini (ES) futures market can be unfavorable to trend following systems. The trending characteristic of the S&P E-mini is not very strong. On the other hand the Euro currency futures shows much stronger trending characteristics. In short you can use this knowledge to help develop trading systems. A trend following system on the S&P daily bar may be a lot more difficult to develop than a trend following system on the Euro.

 

An interesting thought is, has the S&P always acted this way? Was there ever a time when the S&P was a trending market? The answer comes below in the form of an equity graph with our trading system applied to the S&P cash index all the way back to 1960.

 

 

The Market Changed After The Year 2000

 

A different story is seen from 1960 through 2000. During those times the market exhibited a trending characteristic that could be exploited with a trend following trading system. It could also be exploited by investors utilizing a buy and hold mentality. Decades of this trending characteristic has conditioned millions of people to faithfully follow buy and hold. It did well for a long time, and the rewards of that strategy came to be expected.

 

Looking at the graph above, each green dot is a new equity high. That tall equity peek occurred around the year 2000 is when the dot com bubble burst. Since that event the S&P market has lost much of its once trending characteristics and this trading system has created no new equity high.

 

You can bet that at some point in the future, this trending characteristic will return. But until that day, the S&P remains a difficult environment for trend following systems.

[smmatrix 11]

So that's why everything went to hell around 2002-2003. My emini scalping system, not trending, radically changed due to market dynamics.

[joshdance 10]

I would emphasize that your strategy tested seems to be an interday strategy. Intraday, however, the S&P produces many good trends. In fact, I see only one or two days a month where there is complete confusion and no clear direction. Sure, the direction changes once or twice throughout the day, but if you are an intraday trader, there are many good opportunities by following intraday momentum.

 

I appreciate your testing and thank you for posting your results; I agree that the days of "buy and hold" for investing and the 12% average annual expected returns may be gone, for now anyway.

[BlueHorseshoe 10]

Thanks for an interesting post!

 

If you take the approximate dates when your research shows that trend-following in the S&P has clearly begun to fail, and then look at some of the major trend following funds, you'll notice that many of them underwent 'major system modification' around this time. Dunn Capital is a great example - having traded over about a twenty-five year period using exactly the same strategy they were finally forced to reassess how they operated. Obviously most of whatever they changed remains hidden from public knowledge, but the information that is available shows that they massively increased the number of markets traded. Other newer firms such as Winton Capital have taken a similar approach - they are ludicrously well diversified.

 

On a slightly different topic, I think a fairer comparisson could have been achieved by using the optimal lookback for each market. As things stand it could simply be the case that a 50MA is a totally unoptimal setting for the ES, but a perfectly optimal setting for the Euro. I know this isn't the case, and that the point of your argument holds true, but it's worth mentioning.

[TheDude 10]

I would emphasize that your strategy tested seems to be an interday strategy. Intraday, however, the S&P produces many good trends. In fact, I see only one or two days a month where there is complete confusion and no clear direction. Sure, the direction changes once or twice throughout the day, but if you are an intraday trader, there are many good opportunities by following intraday momentum.

 

I appreciate your testing and thank you for posting your results; I agree that the days of "buy and hold" for investing and the 12% average annual expected returns may be gone, for now anyway.

 

Building on this observation, perhaps it's the time frame of the trend that has changed? Perhaps if a 20MA was used for example, we would see a positive equity curve post 2000, but negative pre 2000?

 

One thing that has happened since 2000 is the explosion of the internet and on-line banking across the world. This has enabled mom, pop and uncle joe to take positions, and change those positions every time they read an internet news story on their i-phone. The relative cheapness of technology has also allowed larger investment firms to crunch huge amounts of numbers, performing monte carlo simulations in minutes in what would have taken days or weeks before 2000. This again adds to an increase in sentiment changing more frequently imo.

 

an interesting observation.

[joshdance 10]

Building on this observation, perhaps it's the time frame of the trend that has changed? Perhaps if a 20MA was used for example, we would see a positive equity curve post 2000, but negative pre 2000?

 

One thing that has happened since 2000 is the explosion of the internet and on-line banking across the world. This has enabled mom, pop and uncle joe to take positions, and change those positions every time they read an internet news story on their i-phone. The relative cheapness of technology has also allowed larger investment firms to crunch huge amounts of numbers, performing monte carlo simulations in minutes in what would have taken days or weeks before 2000. This again adds to an increase in sentiment changing more frequently imo.

 

an interesting observation.

 

Yes indeed, sounds very plausible and logical, thank you for posting this.

[BlueHorseshoe 10]

 

One thing that has happened since 2000 is the explosion of the internet and on-line banking across the world. This has enabled mom, pop and uncle joe to take positions, and change those positions every time they read an internet news story on their i-phone.

 

I think that what you describe above has led to an increased directionless-ness (did I make that word up?) across all timeframes. There are more and more market participants, and fewer and fewer of them are doing the same thing at the same time. Whilever this is the case, I think that the market will be less and less able to sustain trends in any timeframe.

 

It's worth noting that two recent clean, low volatility trending periods on the S&Ps daily charts (from mid2010-mid2011, and then the current trend) have been marked by low volume - where trends are concerned, 'two many cooks spoil the broth'.

 

Just an opinion though.

[BlueHorseshoe 10]

 

One thing that has happened since 2000 is the explosion of the internet and on-line banking across the world. This has enabled mom, pop and uncle joe to take positions, and change those positions every time they read an internet news story on their i-phone.

 

I think that what you describe above has led to an increased directionless-ness (did I make that word up?) across all timeframes. There are more and more market participants, and fewer and fewer of them are doing the same thing at the same time. Whilever this is the case, I think that the market will be less and less able to sustain trends in any timeframe.

 

It's worth noting that two recent clean, low volatility trending periods on the S&Ps daily charts (from mid2010-mid2011, and then the current trend) have been marked by low volume - where trends are concerned, 'too many cooks spoil the broth'.

 

Just an opinion though.