Friday, March 1

Opinion: Surprised by Monday’s market rally? Whenever the Dow Jones and S&P 500 fall below this key support level, stocks typically come back with a bang.


Breaking out of the 200-day moving average is not the kiss of death for US stocks, which could explain why the Dow Jones Industrial Average DJIA,
-1.92%
on January 24 he recovered from a 1000 point drop and finished the day. It was late last week when both the Dow Jones and the S&P 500 SPX,
-2.35%
breached their respective 200-day moving averages, which is seen by many stock market technicians as indicating that the main market trend has changed.

The historical record does not support this bearish interpretation. Historically, the US stock market has not underperformed after falling below the 200-day moving average than at any other time.

To show this, I looked at the S&P 500 (or its predecessor index) through the mid-1920s. I focused in particular on all days when the index first fell below its 200-day moving average. As you can see in the table below, the average performance of the S&P 500 after those days was slightly better than on all other days.

yesnext month

next quarter

6 months later

subsequent year

200 day moving average sell signals

0.7%

23%

4.6%

8.2%

all other days

0.6%

1.9%

3.7%

7.7%

Also, none of the differences reported in this graph are significant at the 95% confidence level that statisticians typically use to determine whether a pattern is genuine.

The last 30 years

You may be concerned that the story this chart tells is biased by experience from many decades ago and not as relevant to today’s market. In fact, the pattern shown in the table would be even more pronounced if I had focused only on the last two or three decades. This is not an accident, as I have discussed in previous columns. It’s exactly what you’d expect given the advent of exchange-traded funds that trade easily and cheaply by reference to the S&P 500 (or other broad market benchmarks).

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Take a look at the chart above, which plots the S&P 500 over the past decade along with its 200-day moving average. Keep in mind that, more often than not over the past 10 years, whenever the S&P 500 fell below its 200-day moving average, it almost immediately reversed course and rallied.

There is no guarantee that the same thing will happen this time. Indeed, the current outlook for the stock market may be bleak. The point of this column’s analysis is that those prospects aren’t worse just because the stock market fell below its 200-day moving average.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be contacted at [email protected]

Plus: The S&P 500, Nasdaq has just staged a historic turnaround, marking its biggest comebacks since the 2008 financial crisis.

Also read: Stock market investors can’t count on ‘Fed put’: Why policymakers aren’t seen rushing to the bailout


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