I thought I would update some of the modeling with the semiconductor stocks (SMH), given that we're down more than 5% over the past four trading sessions. One wrinkle I'm adding to the analysis is that I'm examining outcomes across three instruments: SMH, QQQQ, and SPY. This addresses the theme I've been touching upon lately of maximizing the instrument that you trade as well as the timing of trades.
Since March, 2003 (N = 753), we have had 53 days in which SMH has been down more than 5% over a four-day period. Four days later, here's how the outcomes looked:
- SPY: Average gain = .79% (38 up, 15 down). Average four-day gain for sample overall = .24% (435 up, 318 down).
- QQQQ: Average gain = 1.21% (36 up, 17 down). Average four-day gain for sample overall = .31% (421 up, 332 down).
- SMH: Average gain = 1.80% (35 up, 18 down). Average four-day gain for sample overall = .34 (400 up, 353 down).
What we can see is that there are distinctly positive outcomes four days out across all indices. When SMH is very weak over a four-day period, the next four days have been bullish on average. Of the three ETFs, SMH has milked this pattern the most, more than doubling the average gain in SPY. It thus appears that the greatest edge is not only trading to the long side over this swing period, but also trading the very instrument that has been weakest. Let's follow up on this shortly.
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