+141% in five weeks in the stock market with Cindicator’s Macro Sentiments
In April, Cindicator launched a new experimental product: weekly Macro Sentiment Indicators that correctly predicted the S&P 500’s low.
Dozens of traders tested these indicators and one of them, CalvinXTZ, shared a strategy for trading S&P 500 options, generating +141% in just five weeks from May 10 thru June 11, 2020 This post explains how he did it.
What are Cindicator’s Macro Sentiment Indicators?
Macro Sentiment Indicators are based on weekly questions about business, economics and the political environment, present and future.
Every weekend, users get six questions about:
- Current levels of economic uncertainty;
- Current and future levels of unemployment;
- The future attractiveness of the business environment;
- Current and future political stability.
Here is an example:
What is the current level of economic conditions in the country you live in? (10 points per answer, 0–50% = negative, 50–100% = positive)
Analysts give their answer as a percentage between 0% and 100%.
Each indicator is created using an algorithm to average the answers. The difference between the current and the previous week adds another important dimension to it.
How to interpret macro indicators
The key to interpreting Macro Sentiment Indicators is watching for changes and trends.
When there is a big difference between the new indicator and the one for the week before, this suggests that there is a major shift in sentiment.
For example, on May 31, the Employment Situation Current indicator increased from 37 to 59. That’s 62% higher than the previous week.
Other indicators also changed significantly:
- The Employment Situation Future indicator was +46% higher than the previous week;
- Economic Condition was +37% higher.
Together these indicators suggested that people across the world were becoming more optimistic.
Shifts in prevailing moods are reflected in the stock market – at least that’s what the strategy’s performance shows.
Macro indicator performance
CalvinXTZ, the CND token holder and author of another options strategy, developed a strategy for using Cindicator’s Macro Sentiment Indicators.
The basic idea is that when there is a big change up or down in the indicators, traders should buy put options (betting that price will go down) for S&P 500 ETF (e.g. SPY) when the sentiment worsens, and call options (betting that price will go up) when it improves.
The indicators are sent out Sundays, so the options should be bought on Monday with an expiration date of that Friday.
Here is how Calvin came up with this:
“I [CalvinXTZ] analyzed the dataset of the Sentiment Indicators that began with Sentiment Indicators released on Sunday, December 2, 2019 and the S&P 500 as of Friday, November 29, 2019. I compared the weekly change in the S&P 500, from Friday to Friday, to the weekly change in each of the seven Sentiment Indicators. I wanted to see if market performance was correlated to changes in sentiment levels.
The first variable was change in Sentiment. If a Sentiment went up by X% or more, buy a Call on the SPY. If Sentiment went down by X% or more, buy a PUT.
The next variable was change in the S&P 500. I made a base assumption that if the market went up in a week, then a Call on the SPY ETF would have been profitable. And that if the market went down in a week, then a PUT on SPY would have been profitable. It’s a blunt measurement but it was sufficient for my purpose.
I then compared changes in the Sentiment categories to market performance. My question was “How many instances did a Sentiment change by X% or more? Of those instances in which Sentiment change was X% or more, how many times did the corresponding trade (a CALL or a PUT) result in a profit?”
I did this analysis in early May, prior to the Sentiment Indicators published on May 10, 2020.
The question that could lead to a strategy was this: “how many good and bad trades were there at certain thresholds? How many for each Sentiment Indicator? And how many net good trades were there based on each Sentiment and for the group as a whole?””
Here are the results of CalvinXTZ’s backtest using 23 weeks of data (end of 2019 thru week of May 3, 2020) for all of the Sentiment Indicators combined.
|THRESHOLD||# OF TRADES||NET # OF PROFITABLE TRADES|
|10%||91 trades||1 net good trades|
|15%||72 trades||6 net good trades|
|20%||55 trades||11net good trades|
|25%||48 trades||14 net good trades|
|30%||38 trades||12 net good trades|
|35%||32 trades||12 net good trades|
|40%||24 trades||10 net good trades||42% success which is very good|
|45%||21 trades||7 net good trades||33%|
|50%||16 trades||6 net good trades||38%|
Those are the totals for all of the Sentiment Indicators added together. According to Calvin, the sweet spot for trading is the 35-40% threshold of change… but emphasizing just the indicators that have a higher rate of success. By focusing on select Sentiments, Calvin increased the profitable success rate to 71% of the time. You’ll have to ask Calvin which Sentiments seem to be the most successful.
On May 11, Calvin started executing this strategy. He examined the Sentiment Indicators published on Sunday evening, compared them to the prior week, bought the option on Monday with a Friday expiration date, and so on.
Using this strategy over the 5 weeks since May 11, Calvin has done 5 weekly trades: 3 Puts and 2 Calls. Four of those trades have been profitable. The net gain of the 5 trades is 141%.
Most remarkably, this strategy led Calvin to buy a PUT on the market on Monday, June 8. You might recall that the market had zoomed up on Friday, June 5. But the Sentiment Indicators published on June 7, 2020 guided Calvin to buy a Put on Monday to profit if the market went down over the week. That Put was very profitable … as of Thursday, June 11, the S&P 500 is down 5.3% for the week. And that Put position was very profitable.
Here is the trading strategy template in more detail:
1. Divide your capital into 5 parts, about 20% each – each trade will be open for 5 days at most;
2. Once you get the indicator on Sunday, check the threshold differences:
- If 2 or more increased by >35%, buy CALL options;
- If 2 or more decreased by >35%, buy PUT options;
- If the difference is high, but directions are different, do nothing;
3. Buy AT the money options on Monday that expire on Friday for about 20% of your capital;
4. Stop-loss: none, accept the risk that the position could go to zero, chose position sizing accordingly.
5. Take profit: up to you.
For Calvin, this strategy returned +141% over five weeks. It’s still a work in progress, however, so feel free to tinker with it.
The beauty (and the danger) of options is the built-in leverage.
A 1–2% difference in the S&P 500 index could translate into double-digit or even triple-digit gains in options. Or it could make options worthless. High rewards and high risks.
Macro Sentiment Indicators help to reduce the risk by predicting major shifts in the prevailing market mood and the price action that follows.
Here is an entry from Calvin’s notes:
[O]n Monday, 5/11/20, bought the SPY 290 PUT expiring on 5/15/20 for $3.34. For one contract, that would be $334. Could have sold it on Thursday 5/14/20 for $13 … or $1,300 for the single contract.
Could this strategy work with just stocks, and not options? Yes, you can use Macro Sentiment Indicators to catch big moves in the market. In that case, your potential returns would be lower but your risks would also be lower.
Get Macro Sentiment indicators for just $99 per month
Initially, the Cindicator team noticed that these indicators are great for capturing big black swans like the coronavirus bottom of the stock market.
But Calvin spotted something even more important:
“Sentiment indicators give the opportunity for weekly trades.”
Macro Sentiment Indicators are available via a monthly subscription that gives:
🗓 Six weekly Macro Sentiment Indicators;
📈 New trading strategies – in addition to all past and current data, you’ll get new ready-to-use strategies that will be discovered by the Cindicator team and clients (including the trading strategy from Calvin with 88% profit for just three weeks);
👨👩👧👦 Exclusive private chat with traders – you’ll join a community of experienced traders who subscribe to this product, where you’ll be able to ask any questions, freely discussing ideas and strategies to get even more value from sentiment indicators.
The link to the chat and the spreadsheet with new and past data will be available to all new paid subscribers. So you won’t need to figure it all out by yourself – there will be others willing to learn from each other and who genuinely want to generate profit or just talk (trading can be lonely).
As you will remember, we distribute this product on a subscription basis. The first testing month has come to an end, and all users can now subscribe to this product.
DISCLAIMER: This information is not intended to provide a personal recommendation or investment advice and it does not take into account the specific investment objectives, financial situation or particular needs of any specific person. We shall not be liable for any loss, including any consequential loss which may result from reliance on the information or be incurred in respect of any action taken. Past performance is not a guarantee of future performance. We cannot guarantee the accuracy of the indicators. We use reliable and comprehensive information, but make no representation that it is accurate or complete. We assume no responsibility for updating any of the contents or opinions contained herein and therefore accept no responsibility for any actions taken based on the receipt of this communication.