SP500 Down Week Trading Strategy (SPY)

What if a straightforward strategy could deliver solid returns with less risk? We backtested a simple trading approach using the SPY ETF, which tracks the S&P 500, and the results are compelling.

By buying only after a down week and holding for just one week, this strategy achieves an average gain of 0.44% per trade, an annualized return of 9.3%, and a max drawdown of 36%—significantly lower than the buy-and-hold approach. Plus, you’re invested only 42% of the time, freeing up capital for other opportunities.

In this article, we’ll break down the strategy, share the backtest results, and explore why this approach might appeal to cautious investors looking for a low-maintenance way to trade the S&P 500.

Table of contents:

Understanding the SPY Down-Week Strategy

What Is the SPY ETF?

The SPDR S&P 500 ETF Trust (SPY) is one of the most popular exchange-traded funds, designed to mirror the performance of the S&P 500 index. It’s a favorite among investors for its diversification, low costs, and liquidity, making it an ideal vehicle for testing trading strategies.

How the Down-Week Strategy Works

The trading rules are elegantly simple:

Check the weekly close: If the SPY’s closing price on Friday is lower than the closing price from the previous Friday (a “down week”), you buy at the close.
Hold for one week: Maintain the position until the following Friday’s close, then exit.
Repeat: Only enter a new trade after another down week.

This strategy capitalizes on potential short-term rebounds after a week of market declines, avoiding trades during weeks when the market is flat or rising. It’s a low-effort approach that doesn’t require complex technical indicators or constant monitoring.

Backtest Results: Does It Work?

We ran a comprehensive backtest of the down-week strategy on SPY from its inception until today to evaluate its performance. Here’s what we found:

Average Gain Per Trade: 0.44% per trade, offering consistent small wins.
Annualized Return: 9.3%, competitive with the S&P 500’s buy-and-hold return of 10.4% over the same period.
Max Drawdown: 36%, a significant improvement over buy-and-hold’s 55% drawdown, indicating lower risk during market downturns.
Time Invested: Only 42% of the time, meaning your capital is free for other investments more than half the time.

These results suggest the strategy delivers returns close to buy-and-hold while reducing exposure to severe market drops and requiring less time in the market.

The equity curve looks like this:

Why This Strategy Shines: Key Benefits

1. Lower Risk with Reduced Drawdowns

With a max drawdown of 36% compared to 55% for buy-and-hold, this strategy offers a smoother ride. Lower drawdowns mean less stress during market crashes and a faster recovery to new highs.

2. Less Time in the Market

Being invested only 42% of the time frees up capital. You avoid prolonged exposure to market volatility, and your capital is available for other opportunities, whether that’s cash, bonds, or alternative investments.

3. Simplicity for Busy Investors

No need for fancy charting tools or daily market watching. The strategy requires checking SPY’s weekly close and placing a trade once a week at most. It’s perfect for part-time traders or those with busy schedules.

4. Competitive Returns

An annualized return of 9.3% is impressive, especially when you’re invested less than half the time. It’s nearly as good as buy-and-hold’s 10.4% but with less risk and effort.

How Does It Compare to Buy-and-Hold?

The buy-and-hold strategy—buying SPY and holding indefinitely—is the gold standard for passive investing. It’s simple and historically delivers strong returns (10.4% annualized in our backtest including reinvested dividends). However, it comes with significant drawbacks:

Higher Risk: A 55% max drawdown means bigger losses during bear markets, which can test even the most patient investors.
Constant Exposure: You’re fully invested at all times, leaving no flexibility to sidestep volatility.

The down-week strategy, by contrast, offers a compelling alternative. It sacrifices just 1.1% in annualized returns but cuts drawdowns by nearly a third and keeps you out of the market 58% of the time. For risk-averse investors, this trade-off is worth considering.

Is the Down-Week Strategy Right for You?

This strategy is ideal for:

Risk-Averse Investors: If large drawdowns keep you up at night, the 36% max drawdown is a significant improvement over buy-and-hold.
Part-Time Traders: With minimal time commitment, it’s perfect for those who can’t watch the market daily.
Tactical Allocators: The 42% time invested allows you to deploy capital elsewhere when not in SPY.

However, it’s not perfect. The strategy underperforms buy-and-hold slightly (9.3% vs. 10.4%), and it requires discipline to stick to the rules. Transaction costs and taxes on short-term gains could also eat into returns, so consider these factors before implementing.

Tips for Implementing the Strategy

Use a Low-Cost Broker: Minimize trading fees to preserve your returns, especially since you’re trading weekly.
Automate Where Possible: Set calendar reminders for Friday closes or use trading platforms with automated rules to reduce manual effort.
Backtest Further: Our results are promising, but test the strategy over different time periods or market conditions to confirm its robustness.
Consider Taxes: Frequent trading may lead to short-term capital gains taxes. Consult a tax advisor to optimize your approach.
Stay Disciplined: The strategy’s simplicity is its strength. Avoid tinkering with the rules based on emotions or market noise.

Conclusion: A Smart Alternative to Buy-and-Hold

The “buy after a down week” strategy for SPY is a powerful example of how simplicity can yield strong results. With an average gain of 0.44% per trade, a 9.3% annualized return, and a 36% max drawdown, it offers a lower-risk alternative to buy-and-hold while requiring less than half the time in the market.

For investors seeking a balance of returns, risk management, and flexibility, this approach is worth exploring.

Ready to try it? Backtest the strategy with your own data!