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> The daily-bar correlation between SPY and the cash index
> sucks, although the overall movements agree (if the cash index goes
> up, SPY will go up, but the high and low versus the open and close
> won't have any correlation). It was such a consistent loser that I
> tried fading the signals with SPY, but that didn't work either.
>
> There seems to be an arbitrage opportunity here, but I don't know
> what it might be.
The following explanation is somewhat oversimplified. It doesn't account
for pre-open activity on the electronic exchanges, but the general
concept explains why the index quotes you see are WRONG early in the day
and why that "arbitrage opportunity" is an illusion created by the quote
services.
The quoted SPX cash index doesn't have a 'real' open. That's because it
takes a few minutes for all 500 stocks to start trading. The index is
calculated using yesterday's closing value for all stocks that haven't
traded yet today. So, the first tick of the index is usually pretty near
yesterday's close. With some quote services it's identical. Likewise, if
the quoted 'open' on a daily bar is near the high or low, the high and
low are suspect as well. The only reliable daily number for the SPX
index is the close. If you are using the daily open, high and low of the
index in a system, your results will be flawed. If the system makes
money on the daily index, but loses money on the futures or the index
shares, that's just more proof that your system is based on incorrect
assumptions.
Let's see if this daily SPX chart is small enough to make it through the
o-list filter. It shows how every open is exactly equal to yesterday's
close on quote.com. We know that can't be true. Then look at those bars
where the open is exactly the high or low of the day. We know those
aren't true either. So, you may backtest a system that looks just peachy
using that data but you'll lose your a** if you try trading it.
--
Dennis
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