The One Million MNS 99 for December Trade and Hidden Markov Models

Today marks the final opportunity to take advantage of the special offer for the Top 50 Select and 50K Portfolio Discount.

Over the holiday weekend, I spent considerable time analyzing strategies, market data, and their alignment with the current market environment. A noteworthy pattern has emerged from this analysis, one that has significant implications for strategy performance.

Since 1985, 2024 is only the second year (year-to-date) where the Nasdaq 100 has gained more than 10% while the day session posted a net negative return. The last occurrence was in 2007, just before the Great Financial Crisis of 2008. Additionally, 2024 is the first year since 2018 where the nighttime trend has been consistently opposite to the day session trend.

This pattern highlights the challenges in today’s trading environment, particularly for strategies that aim to capture overnight trends and extend them into the day session. In 2024, such swing strategies are often disrupted by the reversal and mean reversion tendencies of the day session. For instance, strategies designed to go long at night and hold into the day session have struggled in this environment.

A recent study revealed a hypothetical pattern that has generated positive returns simply by entering long positions at 4:00 PM and exiting at 9:30 AM, before the day session's mean reversion takes effect. This mixed market behavior has also impacted other patterns, such as Gap Continuation and Gap Fills. Furthermore, divergences in market internals, including NYSE TICK and NYSE ADD, underscore the complexities of this market.

To evaluate these dynamics, we adjusted the One Million MNS 113 portfolio, removing all non-day trade strategies and retaining only day trade strategies. This adjustment eliminated the worst-case drawdown scenario in backtests. In 2024, the market behaves as though there are multiple trading sessions within a single day, with its "state" or memory resetting every 2 to 8 hours.

The increased use of Hidden Markov Models (HMMs) by quantitative firms like Renaissance Technologies may also influence the market's behavior. These models rely solely on the market’s current "state" and disregard historical trends, which aligns closely with the market’s memoryless nature in 2024. Applying HMMs practically involves focusing on concentrated, recent data for short-term asymmetric trades—an approach that has become central to the E-mini Nasdaq strategies in our portfolio.

In response to these findings, we’ve released the New One Million MNS 99 for December, removing 14 strategies and adding one from the One Million MNS 113 portfolio. While we retained some overnight and session-specific strategies in other markets, we removed overnight and swing strategies in the E-mini Nasdaq to address the divergence between its overnight and day sessions.

We are also exploring updates to swing strategies, such as exiting positions before 9:30 AM rather than carrying them into the day session. Segmenting the Nasdaq 100 into distinct sessions may offer a greater edge, given the index’s higher levels and broader ranges.

The hypothetical results for the One Million MNS 99, with its updated strategy composition, make it an excellent entry point for Monday’s trading as we begin December. All Strategy Access Subscribers can download the updated workspaces here.

ONE Million MNS 99

Hypothetical Performance Summary

December 1, 2024

$25 Round Turn Slippage and Commission