SPY – What is it?

SPY – is an exchange traded fund that represents the S&P 500. The official description goes something like this:

“The SPDR S&P 500 ETF represents ownership in the SPDR Trust Series 1, a unit investment trust established to accumulate and hold a portfolio of the equity securities that comprise the Standard & Poor's 500 Composite Stock Price Index. SPDRs seek investment results that, before expenses, generally correspond to the price and yield performance of the Standard & Poor's 500 Composite Stock Price Index. There is no assurance that the price and yield performance of the S&P 500 Index can be fully matched. “

I like to keep a watch on the performance of SPY as it represents the performance of the broad US market. Sure there are other indexes to watch as well. But for me, the first is SPY.  It will change value through the day based on what the individual equities are doing. SPY can be bought and sold just like a stock and its ticker symbol is SPY. I look at an end-of-day chart on SPY after I am back home from work and the US market is closed. Long term, most money managers and mutual funds cannot beat the performance of SPY. For a long term investor in the US markets one could simply buy SPY. The reason I don’t like to do that is that SPY can drop 30-40% during a bear market and I cannot tolerate that big a loss. Some people say it isn’t a loss tell you sell it. That I am afraid is hogwash because I take the current value of the portfolio as what I own. No more. No less. If I buy SPY, I would buy it based on technicals and using a trading system as I am showing on the chart below. My software will place the up, down arrows and exit signal blue balloons after it processes each day's end-of-day data. This particular system is more biased to the upside, so one should be cautious when an exit signal (blue balloon) is generated after an up arrow. Meaning it could drop a lot without showing a down arrow.

When I look at the market, I look at it top – down. I start by pulling up the SPY chart and see what my trading system is saying. If it is above its 20 and 50 day exp moving average, I would say it has a bullish bias. If it drops below these moving averages then consider that it is showing weakness. Options on SPY are also very liquid and have a tight spread. I like to use put options on SPY to hedge my 401K portfolio when the SPY trading system is showing weakness. See chart for SPY below.

My trading system still shows an exit signal on SPY. But notice that the price chart is above its 20 (blue), 50 (red) and 200 (black) day exp mov averages. That alone is enough reason to remain biased long. For safe keeping I still have my hedge on. If I see the most recent high taken out, I would definitely say the market is back on a bull track. For now we cannot say if it will go sideways or if it will falter and turn back down or if it will take the most recent highs out.