BTIG: SPY gap points to poor near-term risk/reward

Published 13/06/2024, 18:40
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BTIG analysts warned in a note Thursday that the recent strong performance of the S&P 500 might be short-term, with potential downside in the near future. Their analysis is based on historical data related to gaps following impressive index moves.

"An impressive index move post CPI yet again, but as always, it's the 'reaction to the reaction' that matters," says BTIG. They point out that the S&P 500's jump today follows a surge in the RSI (Relative Strength Index) and a gap up of more than 0.80% at the open, events that have occurred rarely since 1993.

While BTIG acknowledges mixed historical returns following this specific signal, they highlight a concerning trend in the near term. "The last seven occurrences have seen SPY trade negative 5 days later every time (avg.-1.26%)," they note.

Looking at the best and worst performances over the following five days after such a signal, BTIG finds the upside potential capped at a meager 1.21%, with the downside risk significantly higher, reaching a maximum loss of 4.74%.

"In other words, immediate term risk/reward is skewed fairly negative after this signal," concludes BTIG.

The analysts acknowledge the upcoming FOMC meeting as a potential catalyst for further market movement and the recent strong performance of Apple (AAPL). However, they caution against blindly chasing the rally, particularly given the lack of broad market participation.

"Even with SPX up over 1%, breadth isn't as strong as it would appear with just 73% of NYSE volume in advancing stocks," they say. BTIG identifies the outperformance of the Technology sector as unexpected and suggests financials might have been a more logical leader in the current environment.

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