Trend following & the Greek Referendum

One of the reasons I am a strong believer in trend following is that I have observed that in all cases where markets were supposed to be caught by surprise by an event that shook the markets, the trend was already down. I have in the past given presentations and talks using examples such as the Kobe earthquake, September 11 attacks, our Election results among others. Every time, the trend was already established in line with the future unfolding.

To that extent, this day’s opening gap down of 1.6% was definitely a surprise since markets seems to have had the least amount of any such anxiety going into Friday’s close. In fact, even the Greece markets seemed to have missed any clues as it closed in the Green on Friday.

The non believers though seem to have been having a field day

So Greece was not priced in?

— zerohedge (@zerohedge) June 29, 2015

So, I decided to see, how often this is the case – the case of the short-term trend being up and markets opening down 1.6% or greater. For the short-term trend filter, I used a 15 day EMA.

Since 1999, we have had just 4 such instances with the last event being on 16th July 2013. And other than the 1999 event day, every other day, we actually closed above the open price though on no occasion did the markets close in positive territory (and that includes today obviously).

The table below showcases the performance of the markets for the next 5 days post such events

Based on historical evidence, t+1 which is tomorrow, seems to have an edge in terms of a positive close. But more interesting is that other than in 1999, the bullish trend of the past seems to have held on with this day being an aberration of some sort and not a deal breaker (given the low number of instances).