How do the daily signals add up? This article describes how the performance of the daily Greed and Fear indicator will be measured. This result will give an impression of how useful this indicator might be for daily trading activities. But as always, past performance is not indicative of future results.
First it should be noted that performance is measured in index points, not in Euro's or USD. In the end, the financial result depends on the trading instrument being used (ETF, futures, options etc). Measuring index points also makes it easier to compare performance with the benchmark (S&P 500 index) because both are unleveraged and thus carry the same risk (or volatility) which makes a comparison fair.
Performance is measured per calendar year. At the beginning of every year the result is of course still zero. Both the S&P 500 and the performance of the indicator start at the same level (which is the closing price of the S&P 500 on December 31st of the previous year). It will be the job of the indicator to reach higher levels during the year than the S&P 500, in which case the indicator has outperformed its benchmark. If it falls below, then obviously this is an underperformance.
Every trading day that has a Greed and Fear signal will affect the performance according to the following scenarios:
- Signal is Greed and the market goes up x points (long in up move): the amount of x points is added to the result.
- Signal is Fear and the market goes down x points (short in down move): the amount of x points is added to the result.
- Signal is Greed and the market goes down x points (long in down move): the amount of x points is subtracted from the result.
- Signal is Fear and the market goes up x points (short in up move): the amount of x points is subtracted from the result.
- Signal is Neutral/Unknown (no position): the result will stay the same, no matter what the market does.
In scenario 1 and 2, the signal made a correct market call, adding x points to the result. In scenario 3 and 4, the call was wrong causing a loss in performance.
What this also shows is that, by definition, a strong bull market (many trading days where the market goes up) is almost impossible to outperform. If the indicator does a really good job, we will mostly see scenario 1, but when it occasionally goes wrong in scenario 4, the indicator may start to lag the strong bull move. Obviously, the strongest outperformance will be achieved in scenario 2.
On the detailed result pages of a particular year, a table will show the daily signals and changes to the performance and benchmark on a day-to-day basis, reflecting the scenarios from above. From left to right, these columns have the following meaning:
- Date - Date of the specific trading day.
- S&P 500 - The close of the S&P 500 index on the given date. This value is shown in the chart.
- S&P 500 daily change - The gain or loss made by the S&P 500 index on the given date.
- S&P 500 daily cumulative - This value on the given date is the sum of all previous daily changes, or put differently: the total change since the start.
- G&F indicator - The anticipated market sentiment on the given date. F=Fear, G=Greed, ?=unknown/neutral.
- G&F daily result - The G&F result on the given date, which equals 'absolute value of S&P 500 daily change' if the indicator was right. It equals 'negative absolute value of S&P 500 daily change' when the indicator was wrong and zero in all other cases.
- G&F daily result cumulative - This value on the given date is the sum of all previous G&F daily results, or put differently: the total result since the start.
- G&F cumulative - This value on the given date is the daily cumulative result added to the initial value on the start (which is the value of the S&P 500 index at the start). In other words, it shows the performance compared to the S&P 500 index. This value is shown in the chart.