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The Rocking Russell - A better trading market than S&Ps?

October 25, 2004

 

A quick glance of the top 5 systems at Attain as ranked across seven different statistical measures shows something which has probably never been seen before: e-mini Russell systems taking up three out of the top five spots.

We highlighted the viability of trading the Russell 2000 futures in the April 5th, 2004 newsletter over 6 months ago: http://www.attaincapital.com/alternatives/alt_apr0504.htm, mentioning the impressive run the e-mini Russell had made - as it went from trading under 1000 contracts a day in 2002 to over 42,000 contracts per day in March of 2004. Well if you thought that was impressive, the e-mini Russell volume has nearly doubled since March - hitting an average daily volume of just under 78,116 contracts in September.

We had spoke of how the e-mini Russell had broke the 1 million contract level in April, and the e-mini Russell now trades over 60% more contracts, at 1.6 Million contracts per month. The market has also seen a 457% volume increase over last year, with 12.7 million contracts traded so far in 2004 to far outpace the 2.2 million contracts done up to this point in 2003.

What is driving this volume explosion? Opportunity. Traders will always flock to where the opportunity is, and the volume explosion in e-mini Russell futures represents not only an increase in opportunity in that market, but sheds light on the lack of opportunities elsewhere.

The lack of opportunities elsewhere can be directly attributed to the narrowing ranges in US stock index markets. The 100 day average true range of the Nasdaq futures was 145 points on October 13th of 2000, but has since dropped 84% to a 100 day average daily range of just 23.18 points on October 13th, 2004. The S&P futures have a similar look, as the 100 day average true range as of Oct. 13, 2004 is 62.80% less than it was on Oct. 13th, 2000 - at just 8 points versus 21 points in October of 2000.

If you're thinking these are unfair comparisons because of the high volatility during the bubble burst in 2000, we compared the average true ranges to just one year ago and found they continue to decline. The 100 day average true range has fallen a further 18% in the Nasdaq and a further 41% in the S&P over the past year.

As is clear from these numbers, the profit opportunities in the S&P and Nasdaq markets are becoming smaller and smaller.

Effective Range:

Consider the S&P futures with their average true range of just over 8 points per day. Buying the bottom of that range and selling the top would net an investor approximately $2,000, a figure we call the effective range. The effective range is simply the maximum amount of dollars possible to extract, on average, from a particular market. It is calculated by multiplying the average true range by the contract value. Thus, the 23 point range in the Nasdaq futures produces an effective range of $2,300.

Considering effective ranges from a trading system standpoint, a system can not realistically expect to make 100% of the daily range on one trade. Many investors would be ecstatic if there systems could generate 50% of the daily range. It is therefore in trading system investors best interest to seek out those markets with the highest effective ranges, so no matter what percentage of that range their system makes, the dollar gain is larger.

So what index futures market has the highest effective range? You guessed it, the Russell 2000 futures. At $500 a point for the full size contract and $100 per e-mini, the Russell 2000 futures effective range is more than double that of the S&P futures ($2,020), clocking in at $4,324.

With the range of the Russell and S&P now virtually equal, at 8.64 versus 8.08, the math becomes very easy to understand. If you make 8 points in each market, you stand to make (or lose) double the money trading the Russell, as the value of a point in the Russell ($500) is double what a point is worth in the S&P ($250)

A trading system utilizing the Russell instead of the S&P could afford to be less precise in its entry and exit, therefore, while still making the same amount of money on a winning trade. The higher effective range means investors don't have to peg the high and low of the day to make a decent return.

So where did this Russell contract come from? And what is it? The Russell 2000 was developed by the Frank Russell Co., and is an index designed to track the performance of a set group of companies - similar to the S&P 500 index. Unlike the S&P 500, which tracks the largest 500 companies in the US, the Russell 2000 is a much broader index which measures the performance of the smallest 2,000 companies inside of the Russell 3,000 - which tracks the largest 3,000 companies in the US.

The Russell 2000 is therefore a small cap index, measuring small cap stocks in both the growth and value categories. It has been around for quite some time but has only recently come into the limelight as far as its futures are concerned. The reason for its bursting onto the scene in 2004 is most likely its dynamite 2003 performance. The index was up over 47.25% in 2003, compared with gains of just 28.68% in the S&P 500. With this notoriety as one of the best performing major indices came volume in the form of hedge funds, individual investors, and most recently - trading systems.

So will the Russell take the place of the S&P as THE index futures market? Don't count on it happening any time soon. The full size Russell contract is nearly nonexistent, with just over 2000 contracts changing hands daily on average, and S&P e-mini volume dwarfs the Russell e-mini volume, at 600,000 contracts per day versus approximately 75,000. But the growth in the Russell has been nothing short of spectacular, showing that traders are moving away from the disappearing opportunities in the S&P into the expanding ones in the e-mini Russell.

Many trading system developers have been looking in on the Russell for quite some time now, but many systems utilizing the Russell did so only on a swing trading basis. Day trading system developers are now getting in on the act too, however, and the results have been promising for both day trading and swing trading e-mini Russell systems.(Mariner futures Clipper eRL system has had 10 winning trades in a row in October; and I-Master eRL is at all time equity highs after 35 months of actual performance) A short list of top Russell systems is below:

Available Russell Systems:

Day Trading Russell Systems:

Clipper eRL - $99/ month: www.marinertrading.com (10 winning trades in a row in October, by Compass developer Mariner futures)

Impetus eRL - $1,500 purchase: www.tradingvisions.net (highest Sharpe ratio - return/volatility - at Attain for all systems trading more than 6 mos)