With so much of the money invested in the U.S. being driven by money managers and their search for quality investments for pension funds, it’s no wonder that the majority choose to allocate their capital in the S&P 500.
With this glut of cash regularly flowing into what they feel are value-buying opportunities as investments, swing traders can take advantage of this behavior as those managers are effectively stabilizing a security and providing an opening for successful short-term trading.
We’ve developed a system to capitalize on this behavior using the ConnorsRSI indicator in S&P 500 Trading with ConnorsRSI, a quantified strategy guidebook with 18 strategy variations showing average P/L % of over 10% and over 12 showing winning trade rates of 80% or more!
Below is the first chapter of this guidebook which provides some insight into the history and methodology of this powerful swing trading strategy.
Excerpted from S&P 500 Trading with ConnorsRSI :
After moving from Los Angeles (the entertainment capital of the world) to New York City (the financial capital of the world) in 2007, I gained the opportunity to spend quality time with many top traders and money managers located in the City. One of the gentlemen who I had the good fortune to spend an afternoon with ran a well‐respected trading firm. His background included being an equity trader on two exchanges over three decades with his specialty being trading in S&P 500 stocks. His philosophy was a lot like a number of professionals who learned to trade before the internet boom/bust of the late 1990’s‐early 2000’s. His philosophy was “only buy quality”.
What does “buy quality” mean? In his mind it was companies which have been in business for decades; household names that he knew and understood. It’s interesting because this is the same philosophy popularized by Warren Buffett. But whereas Buffett tends to buy and hold these stocks, this gentleman made his living (a very good living) trading in and out of these same stocks. He felt that holding quality companies for a few days was far safer than holding high volatility companies which he had barely heard of.
Everyone who succeeds in the financial markets does so because they trade at “comfort points”. This gentleman’s comfort point (as is Buffet’s) was to be in stocks that he knew and that would likely be in business for years to come. He had no interest in owning companies he hadn’t heard of. He told me he “liked sleeping at night and owning these companies allowed him to sleep at night.” If you share this same philosophy of “buying quality”, you’re in good company. When I asked him how he traded, he smiled and said coyly, I “buy low and sell high”. I cordially smiled back and then probed further. Ultimately he opened up and without divulging his exact strategy the basis of his philosophy was this:
- The majority of money invested in the United States is done by money managers. The majority of that money is pension money. These managers have a mandate to be in quality companies. The best place to find and invest in quality companies is in the S&P 500.
- The majority of this money that invests in S&P 500 stocks is usually buy and hold money.
- When given the opportunity, these money managers, especially the value buyers, look to buy these stocks if they become cheaper over a short period of time. The better ones know a value when they see one and will allocate more capital to their positions to take advantage of the lower prices.
- Buying at lower prices provides a “short‐term cushion” to these stocks.
- This cushion often allows prices to stabilize and then rise again (it’s the core philosophy of mean reversion trading). Having seen it on the floor and then within his trading firm for decades, he understood that there’s big money out there waiting to buy more shares at cheaper prices, which increases the probability of the stock prices moving higher (we’ll back this up with statistics in the upcoming chapters).
At the end of the day, he knows that big money will always be there in companies he knows and trusts. When he’s wrong, he looks to get out. When he’s right he makes his money and then moves on to his next positions.
This simplicity in trading makes a lot of sense. Intuitively it’s correct. In no way does it mean that every S&P stock behaves this way every time because it does not. S&P 500 stocks like Enron, Lehman and many major banks (especially in 2008) went lower and in some cases out of business. But professional traders are great at understanding what’s going on (value buyers buying at lower, better prices), why it’s going on (in the majority of cases it’s simply a short‐term pullback), and they are able to measure the probabilities of the stock moving higher. In this Strategy Guidebook, we’re going to provide you with the statistics that support the type of buying behavior discussed above.
How the Tests Were Run
- We looked at every S&P 500 stock from January 2001 through the first quarter of 2013 (the final quarter ahead of writing this Guidebook).
- All stocks are included, including the Enrons, Lehmans. etc.
- All trade signals were generated on the close. Entries took place the next day using a limit order, and exits were executed the next day as a simulated market order using the average price of the day.
- Slippage and commissions were not included.
Taking into account all simulated trades from this strategy from over a twelve year period of time, you will learn that as this gentleman stated to me in 2009, big institutions like to buy value when they see it. And they often know that because many markets are somewhat efficient longer‐term, short‐term values often don’t last long. And therefore they provide wonderful opportunities for smart traders, like the gentleman mentioned above, to buy these S&P 500 stocks and quickly sell them for profits; oftentimes within a few days.
What you will see in the upcoming chapters are exact rules. Buy low and sell high is nice to know, but we don’t want generalities. We want specific, non‐optimized, simple‐to‐apply rules to be able to successfully trade S&P 500 stocks. We will give you the rules, the many parameters you can apply with the rules, and the full test results for more than a decade. By the time you’ve completed this Strategy Guidebook, you’ll know when to buy S&P stocks, when to exit them, and the historical returns for the 12 ¼ years of testing; a period where the market dropped, rose, crashed, and then rebounded ‐‐ all in all a rough time for long‐term investors. But it was a great time for people who knew when to buy and sell the stocks within the S&P 500 Index.
End of Excerpt
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