by Russell Sands

Please see the following table of ‘Buying the Open-Selling the Close’ daily results for the Bonds and S&Ps. It appears at first glance that, other things being equal, you would want to buy the Bonds on Fridays and the Stocks on Mondays, and sell the Bonds on Mondays and the Stocks on Fridays.

However, the story is not quite that simple. I was curious about these daily results when I added up the totals. Going back slightly longer than the original work, and picking as a starting point right after the crash in 1987, I found that the S&P Composite Average moved from a value of 260.00 to 440.00, a move of 180 handles (points), which translates into $90,000. I was stumped, until somebody explained it to me – buying the open and selling the close every day resulted in $30,000 in profits, because it actually earned $90,000 in profits, but gave back $60,000 in commissions! (Five years equals approximately 1200 trading days x $50 commission on each trade equals $60,000 in total commissions).

This explained my other problem with the data. Having been a cash fixed income trader, I knew we had been in a long term bull market in Bonds for the past several years (starting that day in ’87 with a six point ‘flight to quality’ rally when the stock market crashed) and I couldn’t figure out why the same time period that I studied resulted in a net $30,000 loss for the Bonds (similar to the results above). My long term charts showed me that Bonds had rallied from 87.00 to 113.00 (on a price adjusted basis). Well, that’s right. The thirty point rally in the Bonds meant a $30,000 gross profit, but after subtracting the $60,000 commissions generated (as shown above), you wind up with a net $30,000 loss!

My conclusions were that even though the results above are net of all commissions, and you can still make a profit in the S&Ps blindly following directions on Mondays and Fridays, the commission vigorous is just too abusive to make this game worth playing. But this information is still valuable in other ways. For example, let’s say you are long the S&Ps, with a loss from initiation, and you are now coming up on eight or nine days worth of lows, and it’s now Wednesday. Well, you might want to liquidate your position now in anticipation of the market going down even further within the next forty-eight hours.

Or let’s say it’s Friday morning, you’re thinking of going long on Bonds because they are about half a point away from a major breakout to the upside. A government report comes out in the morning and Bonds start to rally. Maybe you should buy them right away, anticipating the upcoming breakout. Since Bonds have a tendency to close stronger than they open on Friday, they will probably get up to that breakout point sometime during the day and you can get in a little earlier.

Then, I found a more advanced way of incorporating the above information into my trading. I was long a lot of commodity positions, including grains, foods, and precious metals. In fact, about half of the components of the CRB Index. Now it so happens that the Bonds and the CRB Index are negatively correlated, which makes sense when you think about how to hedge all my long positions, and when I couldn’t find anything that I wanted to sell short, I thought about buying Bonds. I had been watching how Bonds had gone down recently on days when Silver (my largest position) or the Grains would rally, so I knew that this negative correlation was in sync at the moment.

In fact, Bonds had made a recent four week breakout to the downside, but had rallied back a little since then so that everyone who sold short at that breakout was now sitting with a loss. This meant the market could be vulnerable to a short covering rally. It was also Friday, which was an upward bias day for Bonds. There was an Employment report due out in the morning, and I knew it was going to be a volatile day. Right before the report came out I entered a stop order to buy Bonds about seven ticks above where they were currently trading. I figured if the report was bullish, the market would fly right through my stop and keep going, giving me Bond profits to hedge against my commodity positions. But if the report was negative and Bonds went down, my long commodity positions would rally and I would be okay. Well, the Bonds went screaming up after the report, and I closed one and a half points higher on the day. I got up eight ticks, skid on some of my half position, but still managed to make $2,000 on Bonds that day, which covered all my losses as my other positions went down.

Figuring it was an over-reaction to the employment report, I got out on the close, and felt like the extra $2,000 day trading helped cushion my positions. Then on Monday it happened again. Metals were called sharply lower, right through my stops, following through their Friday weakness. Having made that extra cushion, and still having a profit from my initiation prices, I decided not to liquidate, but to hold on as long as possible (being bold with profits). Partly in response to commodities opening lower, and partly as Friday follow through, the Bonds started to rally. But I had closed out my nice little Bond trade, and had no hedge protection. As Bonds rallied, I bought the S&Ps (positive correlation to Bonds, and this was Monday!) Bonds were up ten ticks and the S&Ps were up 200 points when I finally got in. The Bonds petered out, but the S&Ps kept going, closing the day almost 500 points higher. I ended the day with a $1,500 profit on one S&P, enough to cover what I lost as my long commodity positions went down. The next day my long term positions resumed their uptrend. I saved myself getting whipped out and made an extra $3,500 to boot.