International
Focus
Running with the Crowd: The Ten Percent Solution
Recently, the press has written several stories on the sudden increase in market volatility during the final hour of the regular trading session (15.00 - 16.00). A wide array of reasons has been offered in an attempt to explain this anomaly. According to an article in the Wall Street Journal (December 15, 2008), along with the usual suspects, the latest culprit to stand in this familiar lineup of undesirables is the leverage aspect of several ETFs, which allows the investor to automatically double or triple his or her performance.
Margin calls have always been a prime suspect for causing lower prices; they become more of a target for criticism during a bear market. When the market experiences a large single-day loss, the brokerage companies -- to satisfy margin requirements -- automatically sell shares in a customer's account.
Nevertheless, for pure technicians, these hypothetical discussions take a backseat to concrete analysis. So, if there are "wild swings" in the final 30 minutes of the trading day (3.30 - 4.00), how can we spot them?
Fortunately, using the "Time Template" option within eSignal allows us to pinpoint this extreme volatility during the last decisive 30 minutes. This template, which allows us to customize our charts, is a very useful component. After entering the necessary information, the next step is to use your new "Time Template" by inputting a trading symbol.
Fertile Giant
To corroborate this premise of wild swings causing destruction to our portfolios, it is best to look at an international ETF with excessive trading volume. Because I spend much of my time in three major Chinese cities, and because China is the epicenter of recent economic attention, I am downloading intraday prices from the FTSE-Xinhua China 25 fund (ticker: FXI). This ETF comprises 25 mainland companies, which trade on the Hong Kong Exchange.
This economic gorilla has 2 trillion dollars in reserves. It has an insatiable appetite for raw materials, an industrious workforce, as well as an abundance of capable managers. Despite its earlier success, this export-driven economy has fallen 35.44 percent from August 6 until April 1, 2009. This study, however, investigates its performance during the final hour of trading.
In the previous 163 trading days, this ETF of 25 companies had positive performance results.
Aug. 6, '8 - Apr. 1 '09 |
sum |
standard |
10 percentile |
90 percentile |
15.00 - 15.30 ET |
$1.69 |
.309 |
-$0.328 |
$0.328 |
15.30 - 16.00 ET |
$0.75 |
.460 |
-$0.526 |
$0.540 |
With the bear market in full swing, it is somewhat surprising to produce these statistics -- especially since this fund fell 16.04 -- however, both timeframes were profitable. The bottom bracket produces more volatility, but with such a wide range of scores during the last half-hour of trading, it gives us tremendous flexibility to implement different trading strategies. Before executing any orders, look closely at the timeline of this eSignal chart.
In bad times, the FXI has more downside movement but appears to outperform this E-mini S&P 500 continuous futures contract. The next bar chart shows the trading action during the final hour (15.00 - 16.00 ET).
The chart allows us to compare changes in volatility by looking at the different shades of purple. We begin (left side) with this stock around 32. As this international index of 25 companies begins its freefall, there is greater space between the highest and lowest price.
After achieving its lowest price (19.40) on October 27, 2008, the price began to waver -- the lengths of the bars were similar, but its performance kept shifting. The largest streak was two consecutive hours of an advancing or declining session.
The red arrow shows a blowout increase in single-day volume, which was the catalyst for a strong recovery. But, after a series of strong advances, its price range becomes more constrictive. More recently, as it struggles to regain ground, its volatility is still inactive.
Declines in Price: A Continuation of Bad Times
If there is an extreme loss (bottom 10 percent of the 163 trading days), does this poor performance carry forward into the next 30 minutes (3:30-4:00 ET)?
After producing a loss in the bottom 10 percent, the results of these 16 days were negative -- a loss of 3.46 with an average loss of 21.63 cents. Following these downward conditions, this definitely shows a continuation of bad times.
But, remember that these 163 trading days occurred during a bear market. Because market participants have already been mauled by going long, they are less likely to hold a long position when the market is performing poorly. Consequently, when prices are cascading downward, as in this current environment, it is best to offset your long position.
Advances in Price: A Continuation of Good Times
Conversely, if you took a long position at 15.30, after experiencing one of the best 16 performing days (upper 10 percent of the best performing days), during the 15.00 - 15.30 time frame, your profit was 6.17 (a 38.53 cent profit). Unlike the negative side, these results are contrary to the prevailing bearish market.
Either way, extreme scores coming within the 15.00 - 15.30 time slot appear to be a catalyst for forceful action in the final hour of trading. Although this is a restrictive system offering us fewer opportunities, these results encourage us to become more aggressive after an extreme result.
Because each instrument has its own personality, it is best to perform a separate examination; however, in the final 30 minutes, there is a tendency for stocks to behave in a similar manner -- especially when the equities markets experience an extreme movement in price.
Some of the reasons for this surge in volume during the final hour of trading are attributed to covering margin calls, offsetting positions before the final bell, closing positions before the release of after-hour earnings reports and the like. Despite the stories circulating, which focus on blaming these high-octane ETFs for the rollercoaster ride, we still need to verify or challenge these assertions through technical analysis.
If we discover new patterns, it is our responsibility to design an effective strategy that would allow us to trade on these inconsistencies (that is, until they no longer work).
Remember to closely monitor the success of this strategy. Although it is working in the current bearish environment, this pattern will not hold forever.
The latest list detailing the percentage of holdings for these 25 companies can be found at:
http://us.ishares.com/product_info/fund/holdings/FXI.htm
