Six years or so ago, I found myself driving onto the grounds of a posh Long Island golf and tennis club to meet with a very interesting man...
The new guy was a quantitative analyst - a "quant" - who did deep dives into market data to find actionable patterns and ways to make money. Quants are kind of like the rocket scientists of the market.
My hedge fund partners and I had been following his work for a while, and we were interested enough to see whether he'd do some contract work for the fund or maybe even come aboard if the fit was right.
He was excited to show me some notes he had on the market.
And I was deeply impressed with the moneymaking potential I saw on the paper - even if I was a little shocked by how he came by these notes...
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A Market Blast from the (Relatively) Distant Past
My friend whipped out his programming notes to show he was using the Fortran computer programming language. By computing standards, Fortran is positively ancient, almost prehistoric. The programming language was first compiled in 1957 - the same year Sputnik was launched! This quant was really rockin' it old-school.
I used to use Fortran myself, inputting instructions on punch cards, no less, as a freshman engineering student back in the 1980s.
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Now, to be honest, Fortran's had some updates in the meantime, the latest coming out in 2018. It's been kept updated because the venerable language is still very useful at, among other things, crunching numbers - a quant's bread and butter.
The results of his "vintage" programming and massive statistics database were pretty cool - and quite useful, too. He never joined the fund, but we contracted with him for analysis for many years.
In fact, I still check in on his work from time to time, and I was not surprised to see some insightful data that he churned out about current market conditions.
Fascinatingly, he's uncovered a pattern that's so rare that it's happened just 3.9% of the time since 1950.
Let's dig in...
This Is Like the Halley's Comet of the Stock Market
The pattern that my favorite vintage computing enthusiast 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 the next month.
What is unusual and unexpected 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 834 months (70 years) since 1950.
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 gave me these tantalizing tidbits of data to follow up:
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In the prior 33 occurrences, 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.
And 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 25:1.
Now, to be clear, this doesn't mean you should go out and bet the farm on what's going to happen in the next six months. But with options, you by no means have to make a big bet; an 8.7% or 2% move up or down in the markets can be easily and safely leveraged with calls and puts for pennies on the dollar.
Case in point: My 10-Minute Millionaire Insider subscribers got the chance to double their money and close out a 100% win in 2.5 trading days on a stock, Progressive Corp. (NYSE: PGR), that moved less than 5%. And they paid less than $117 to do it.
When you're trading options, quantitative analysis and insights like this, which can help inform your bullish or bearish moneymaking posture (and thereby put you in front of big, triple-digit gains), are absolutely priceless, even if the question is as simple as whether the market's likely to go up or down by a relatively modest amount.
Not bad for an Eisenhower-era system!
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About the Author
D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.