The SPY is pulling back to some historically friendly trendlines
The S&P 500 Index (SPX) has pulled back in recent weeks, falling about 3% from its recent high. Some investors are probably wondering if there’s an optimal point to buy the dip. This week, I will be conducting an analysis on market timing by quantifying the returns of the SPDR S&P 500 ETF Trust (SPY) after pullbacks to various moving averages. I consider the returns of the index ETF as well as its options. Hopefully, this analysis will help us identify the ideal “sweet spot” for buying the dip and enhancing our profits.
What's in a Pullback?
I defined a pullback to a moving average by setting four criteria. The moving average had to be increasing, the ETF had to be above the moving average at least 75% of the time over the past six months, the ETF low had to get within 1% of the moving average, and it had to be above this threshold for at least a month prior to that signal. Then, I found the SPY return over the next month of trading and the return of an at-the-money call option that expired in a month. Defined this way, the SPY had the following recent signals:
- August 3rd: Pullback to the 40-day moving average
- August 8th: Pullback to the 50-day moving average
- August 15th: Pullback to the 60-day moving average
Do these pullbacks tend to be good entry points? I quantified the returns on pullbacks to various moving averages over the past five years. The table below summarizes the SPY returns and the return of a call option on the SPY after signals to each of the moving averages.
The green highlighted cells show the best moving average for the corresponding metric. A pullback to the 40-day moving average has had the best average SPY return of 0.85% compared to the other moving averages I tested. A pullback to the 120-day moving average led to the best chance of having a positive SPY return (83%), then the last three columns summarize the returns of the call options.
The table shows there have been nine prior pullbacks to the 60-day moving average, not including the one yesterday, leading to an average SPY return of 0.6% with 56% of the returns positive. That’s not a bad return, but it has led to call returns which have been slightly negative (-3%) on average with 56% of the call returns positive and only one of the nine returns being at least 100%.
Based on the table below, especially if we’re using options, we might want to wait before pulling the trigger on an entry point. Call options on the SPY performed best on pullbacks to somewhere around the 80-day moving average to 120-day moving average. We’re not quite there yet.
Should You Buy the Dip in Other Sectors?
Doing this analysis on some other popular indexes found an interesting signal last week. The Invesco QQQ Trust Series 1 (QQQ) pulled back to its 50-day and 60-day moving averages. Prior pullbacks to these moving averages, however, were not impressive.
The SPDR Gold Shares (GLD) pullback to its 200-day moving average is interesting. There have been four prior pullbacks to this moving average with the ETF gaining 6.4% on average after pullbacks. Buying an at-the-money call on GLD after these pullbacks would have yielded about 250% on average with three of the four returns positive and two of them doubling your money.
