SPY Returns Nearly Two Standard Deviations Above Average

Stock prices continued moving higher yesterday after Federal Reserve Chair Janet Yellen indicated she would continue with a policy of easy money. SPDR S&P 500 (NYSE: SPY) is now 4.67% above the low reached last Wednesday. A chart displaying returns distributions is available at Trading Market Analytics and the one-week returns for SPY are shown below.

spy returns

The current gain is shown as the dashed vertical line and is nearly two standard deviations above the average one-week gain of 0.11% seen since January 2001. A pullback from this level would not be unexpected and inverse ETFs would benefit from a pullback.

Because markets can go to extremes, a scale-in strategy as explained in the Connors Research Guidebook ETF Scale-In Strategy could be useful. If the price of stocks continues to go up, scale-in trading provides the opportunity to add to your position in an inverse fund at even better prices and you can continue to buy as prices go lower until you have established your full position. If prices go down, the advantage of scale-in trading is that you have obtained some exposure to your desired position and will profit from the move.

Direxion Daily Financial Bear 3X Shares (NYSE: FAZ) is again among the most oversold stocks and could be among the biggest winners in a pullback. FAZ ended trading yesterday with a PowerRatings of 9.

fazPowerRatings are based on the relative strength or weakness of particular stocks or ETFs. The higher the rating, the greater the one week historical gain has been for stocks and ETFs with that rating. For best results, enter trades on stocks with a PowerRatings of 8 or higher with a limit order 3-7% below the previous day’s closing price. Higher % limit entries have historically shown a greater percentage of winning trades but higher % limit orders also reduce the chance of trade execution.

In the past, buying stocks with a rating of 9 on a 3% pullback the next day and selling five days later has been profitable 75% of the time. The average winner has gained 4.3%. Other entries and exits also show high winning percentages and large average gains.

FAZ should be considered a buy on additional weakness.

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All data is as of the end of day on 2/11/2014.