Five Statistically-backedFive Statistically-backed Theories on

“How Markets Really Work”Larry Connors Co-authorLarry Connors, Co author

1Copyright © 2012 Connors Research, LLC. All Rights Reserved.

DISCLAIMER

Connors Research, LLC ("Company") is not an investment advisory service, nor a registered investment advisor or broker-dealer and does not t t t ll t hi h iti i t h ld b ll f th l Th l t d l ffili t fpurport to tell or suggest which securities or currencies customers should buy or sell for themselves. The analysts and employees or affiliates of

Company may hold positions in the stocks, currencies or industries discussed here. You understand and acknowledge that there is a very high degree of risk involved in trading securities and/or currencies. The Company, the authors, the publisher, and all affiliates of Company assume no responsibility or liability for your trading and investment results. Factual statements on the Company's website, or in its publications, are made as of the date stated and are subject to change without notice.

It should not be assumed that the methods techniques or indicators presented in these products will be profitable or that they will not result inIt should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results of any individual trader or trading system published by Company are not indicative of future returns by that trader or system, and are not indicative of future returns which be realized by you. In addition, the indicators, strategies, columns, articles and all other features of Company's products (collectively, the "Information") are provided for informational and educational purposes only and should not be construed as investment advice. Examples presented on Company's website are for educational purposes only. Such set-ups are not solicitations of any order to buy or sell. Accordingly, you should not rely solely on the Information in making any investment. Rather, you should use the Information only as a starting point for doing additional independent research in order to allow you to form your own opinion regarding investments. You should always check with your licensed financial advisor and tax advisor to determine the suitability of any investment.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING AND MAY NOT BE IMPACTED BY BROKERAGE AND OTHER SLIPPAGE FEES. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFITSIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.

Connors Research, LLC10 Exchange PlaceSuite 1800

Jersey City, NJ 07302

Copyright © 2012 Connors Research, LLC. All Rights Reserved.

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Welcome!Welcome!

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My Background

• 30 years of experience working in the financial markets industry starting in 1982 at Merrill Lynch.

• Managing Partner of LCA Capital, an asset g g p ,management firm, and Connors Research, a financial markets research company.

• Authored top-selling books on market strategies and volatility trading, including How Markets Really Work, S S ( ) SStreet Smarts (with Linda Raschke) and Short Term Trading Strategies That Work.

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Table of Contents

CHAPTER 1 MARKET EDGES

CHAPTER 2 SHORT TERM HIGHS AND SHORT TERM LOWSCHAPTER 2 SHORT-TERM HIGHS AND SHORT-TERM LOWS

CHAPTER 3 HIGHER HIGHS AND LOWER LOWS

CHAPTER 4 UP DAYS IN A ROW VS. DOWN DAYS IN A ROW

CHAPTER 5 MARKET BREADTHCHAPTER 5 MARKET BREADTH

CHAPTER 6 VOLUME

CHAPTER 7 LARGE MOVES

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Table of Contents (con’t)

CHAPTER 8 NEW 52-WEEK HIGHS, NEW 52-WEEK LOWS

CHAPTER 9 PUT/CALL RATIOCHAPTER 9 PUT/CALL RATIO

CHAPTER 10 VOLATILITY INDEX (VIX)

CHAPTER 11 THE 2-PERIOD RSI INDICATOR

CHAPTER 12 HISTORICAL VOLATILITYCHAPTER 12 HISTORICAL VOLATILITY

CHAPTER 13 CREATING A SAMPLE STRATEGY FROM THIS BOOK

CHAPTER 14 APPLYING THE INFORMATION IN THIS BOOK

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What Moneyball did forWhat Moneyball did for baseball, How Markets Really Work does for the t k k tstock market.

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It’s not about emotion, it’s about statistical results!

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Ed Thorp – (from Wikipedia)Ed Thorp (from Wikipedia)

Since the late 1960s Thorp has used hisSince the late 1960s, Thorp has used his knowledge of probability and statistics in the stock market by discovering andthe stock market by discovering and exploiting a number of pricing anomalies in the securities markets and he has made athe securities markets, and he has made a significant fortune.

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Th ' fi t h d f dThorp's first hedge fund was Princeton/Newport Partners. He is currently th P id t f Ed d O Th &the President of Edward O. Thorp & Associates, based in Newport Beach, CA. I M 1998 Th t d th t hiIn May 1998, Thorp reported that his personal investments yielded an annualized 20 percent rate of ret rn a eraged o er20 percent rate of return averaged over 28.5 years.

- This is an over 18,000% return since the original investment was made!

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original investment was made!

F Ch t 2From Chapter 2…It’s better to buy stocks on pullbacks th b k tthan on breakouts.

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Why?Why?

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Because the statistics back it up.

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Figure 2-1 S&P 500 5-Day Lows in the S&P 500Figure 2 1. S&P 500. 5 Day Lows in the S&P 500 Significantly Outperformed 5-Day Highs

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Figure 2-4 Nasdaq 100 10-day Lows OutperformedFigure 2 4. Nasdaq 100. 10 day Lows Outperformed 10-Day Highs by a Better Than 3-1 Margin

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From Chapter 4…It’s better that the

k t hmarket has gone d t d thdown today than gone upgone up.

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Figure 4-5 Nasdaq 100 Two Down Days in a Row inFigure 4 5. Nasdaq 100. Two Down Days in a Row in the Nasdaq Outperformed 2 Up Days in a Row After 1 Week

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Figure 4-6 Nasdaq 100 3 Down Days in a Row HaveFigure 4 6. Nasdaq 100. 3 Down Days in a Row Have Outperformed 3 Up Days in a Row in the Nasdaq by an Almost 4-1 Margin After 1 Week

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From Chapter 7…L dLarge one-day

dmoves down are better than largebetter than large one day moves upone-day moves up.

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Figure 7-2 S&P 500 2% Declines Have OutperformedFigure 7 2. S&P 500. 2% Declines Have Outperformed 2% Gains in the S&P 500 After 1 Week

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Figure 7-4 Nasdaq 100 2% Nasdaq Losses HaveFigure 7 4. Nasdaq 100. 2% Nasdaq Losses Have Outperformed 2% Nasdaq Gains by a Significant Margin After 1 Week

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From Chapter 12…p

Don’t invest inDon’t invest in high volatilityhigh volatility stocksstocks.

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Table 12-1 Historical Volatility (100-day) Test ResultsTable 12 1. Historical Volatility (100 day) Test Results, 1/1/1995 to 9/30/2011 (8,058 Symbols)

BucketReturn 252 Trading Days Later % Winners

Avg % Loss of Losing Trades

Lowest HV 1 9.7% 66.0% ‐19.8%

2 10.3% 61.1% ‐25.2%

3 10.6% 56.7% ‐30.9%

4 9.8% 51.1% ‐37.4%

hHighest HV 5 5.4% 44.2% ‐44.4%

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There are 14 chapters of pinformation like this in

How Markets Really WorkHow Markets Really Work, 2nd Edition, recently published by , y p y

Bloomberg Financial.

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From the Connors Research Trading Strategy Series

ETF Gaps Trading

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A gap is simply a security whose opening price is either above or below p g pthe previous day’s high or low.

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So when have gap reversals madeSo when have gap reversals made money?

When the gap has occurred after the ETF was already oversoldETF was already oversold.

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Here are the rules of our version of ETF G T diETF Gap Trading:

1 W l k d t ETF f 20061. We looked at every ETF from 2006-2011 that has had an average

l f t l t 250 000 hvolume of at least 250,000 shares, and at least 50,000 shares per day,

th t 21 t di d (over the past 21 trading days (one month). We do this to assure we’re

l t di li id ETFonly trading liquid ETFs.

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Here are the rules of our version of ETF G T diETF Gap Trading:

2 Th 2 i d RSI f th ETF l2. The 2-period RSI of the ETF closes under 5 today. This tells us that the ETF i ld ( lETF is oversold (some people consider this level to be extremely

ld)oversold).

3 T b th ETF th if3. Tomorrow buy the ETF on the open if it gaps lower (it opens below today’s l )

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low).

Here are the rules of our version of ETF G T diETF Gap Trading:

4 W l k t lti l it i t i th4. We look at multiple exit points in the ETF Gap Trading Strategy G id b k b t f t d ’ tiGuidebook but for today’s meeting let’s look at the test results if we exit

th l h th ETF lon the close when the ETF closes above its 3-period moving average.

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And here are the test ltresults...

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ETF Gap Trading Results, 2006-2011.

No of Avg %

Avg. Trading Days Exit LimitNo. of 

TradesAvg. % Profit/Loss

Days Held % Winners

Exit Methodology

Limit Entry % Long/Short

2,170 1.17% 2.13 72.07% C>MA3 0% Long

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If you would like to take a closer look at this strategy or any of our other strategies in theor any of our other strategies in the Connors Research Trading Strategy Series, please click on the links below:click on the links below:

Stock Gaps http://tinyurl.com/tradestockgaps

St k P llb kStock Pullbackshttp://tinyurl.com/tradestockpullbacks

ETF Gapshttp://tinyurl.com/tradeetfgaps

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p y g p

To Summarize What We Learned Today

1. Traders like Ed Thorp, James Simons of Renaissance Technologies, and many others have made fortunes by identifying and trading statistical anomalies.identifying and trading statistical anomalies.

2. Many of these statistical anomalies occur on a short-term basis in oversold conditions when fear is at it’s greatestbasis in oversold conditions when fear is at it s greatest.

3. On longer-term investments, stability (low volatility) outperforms high volatilityoutperforms high volatility.

4. Statistical anomalies still exist today in a number of mainstream strategies as we just learned looking at ETF gaps.

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5. It’s not about emotion, it’s about statistical results!

Questions and AnswersAnswers

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If h ti b t thiIf you have any questions about this presentation or about our C R h T di St t S iConnors Research Trading Strategy Series, please feel free to contact me at l @ hlconnors@connorsresearch.com

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Thank You!Thank You!

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DISCLAIMER

Connors Research, LLC ("Company") is not an investment advisory service, nor a registered investment advisor or broker-dealer and does not t t t ll t hi h iti i t h ld b ll f th l Th l t d l ffili t fpurport to tell or suggest which securities or currencies customers should buy or sell for themselves. The analysts and employees or affiliates of

Company may hold positions in the stocks, currencies or industries discussed here. You understand and acknowledge that there is a very high degree of risk involved in trading securities and/or currencies. The Company, the authors, the publisher, and all affiliates of Company assume no responsibility or liability for your trading and investment results. Factual statements on the Company's website, or in its publications, are made as of the date stated and are subject to change without notice.

It should not be assumed that the methods techniques or indicators presented in these products will be profitable or that they will not result inIt should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results of any individual trader or trading system published by Company are not indicative of future returns by that trader or system, and are not indicative of future returns which be realized by you. In addition, the indicators, strategies, columns, articles and all other features of Company's products (collectively, the "Information") are provided for informational and educational purposes only and should not be construed as investment advice. Examples presented on Company's website are for educational purposes only. Such set-ups are not solicitations of any order to buy or sell. Accordingly, you should not rely solely on the Information in making any investment. Rather, you should use the Information only as a starting point for doing additional independent research in order to allow you to form your own opinion regarding investments. You should always check with your licensed financial advisor and tax advisor to determine the suitability of any investment.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING AND MAY NOT BE IMPACTED BY BROKERAGE AND OTHER SLIPPAGE FEES. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFITSIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.

Connors Research, LLC10 Exchange PlaceSuite 1800

Jersey City, NJ 07302

Copyright © 2012 Connors Research, LLC. All Rights Reserved.

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