Here's part of a note that I sent to Miura's client yesterday:
I think the S&P 500 is due for a pullback this week. Here are my reasons:
- More than 80% of S&P 500 stocks are above their 5-day moving averages.
- 1,3 and 5-day returns are statistically strong, suggesting some short-term mean reversion is likely.
- S&P 500 now overbought on time horizons up to 21 days.
- Option expiry at the end of the week on Friday 18/10.
- Earnings season begins this week.
- My studies of short-term up regimes lasting longer than 12 days (median since 1950) show that a drawdown is common/normal between days 22-35.
My plan is to ride this pullback out. My reasoning is that:
- A pullback is "normal", so long as it's contained to 2-3%.
- We have a decent profit cushion on existing positions.
- Miura isn't too exposed to mega cap S&P 500 stocks.
I may need to start trimming exposure if the pullback is more severe than 2-3% down as this would likely end the short-term up regime.
This turned out to be a precinct call. The SPY ETF was down -0.78% on higher volume. The main reason for today's sell off seems to be ASML's poor forward guidance. This sent the semiconductor sector down by more than 5%, dragging the tech heavy S&P 500 and Nasdaq 100 with it.
Overall the dashboard remains positive. The S&P 500 was overbought heading into today's session and the AMSL announcement was as good a reason as any to take profits.
All three regime models - short, medium and long-term - are in UP mode. The S&P 500 is in an uptrend and breadth is strong. It is normal for a short-term UP regime to experience a pullback between days 22 and 35.
The one negative is that distribution (i.e. selling on large volume) is starting to add up. The S&P 500 has now racked up four major distribution days since its last major accumulation day.
Short, medium and long-term regime models are all aligned in UP regimes. This is one of the strongest regime combinations (4/15) since 1950. It is also the most common. The three combinations that perform better are:
- ST=U, MT = MR, LT = D
- ST=MR, MT = D, LT = D
- ST=MR, MT = D, LT = M
These combinations occur during the formation of a bottom after a bear market. Consequently, they don't occur very frequently.
Breadth, as measured by the percentage of S&P 500 stocks above their individual moving averages, remains strong across all time horizons.
All of the major indices, all of the style indices and 8/11 sectors are in short-term UP regimes. The medium-term regime dashboard looks very similar.
DISCLAIMER
This post is for educational purposes only. It is not a recommendation to buy, sell, hold or do anything at all. I don't know you or your circumstances, which are probably different from mine.
I'm trusting you to act like an adult. This means that you:
• Understand that no method of analysis is perfect
• Take responsibility for your decisions
• Set your risk level and decide on a risk management strategy before trading
• Don't "bet the farm" on any single trade
• Act quickly (i.e. sell) if a trade doesn't live up to your expectations
