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Market Sentiment At Its Lowest In 10 Months

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Is The SP500's 200-Day Providing Some Insight?

Long-Term Trend

The S&P 500's 200-day moving average is commonly used to track long-term trends. All things being equal, the stock market bulls prefer the S&P 500 to remain above the 200-day. The bears are more content when price drops and stays below the 200-day. As shown in the 2015 chart below, the S&P 500 has printed twelve consecutive daily closes above its 200-day moving average. From a historical perspective, do rallies typically fail or succeed after twelve consecutive closes above the 200-day?

S&P500 Daily 2015 Chart


1990 - The Rally Continued

There are not too many historical cases in the last 30 years that featured a significant drop below the 200-day (7% to 19%) followed by a rally back above the 200-day. One case that fits the profile is 1990.

S&P500 Daily 1990-1991 Chart

What happened after the twelfth consecutive close? Stocks tacked on an additional 33% between point A and point B.

S&P500 Daily 1990-1991 Chart 2


1998 - The Rally Continued

In 1998, the S&P 500 slashed through its 200-day moving average, formed a double bottom, and then rallied back above its 200-day moving average for twelve consecutive sessions, which is similar to what we have seen in 2015.

S&P500 Daily 1998 Chart

What happened after the twelfth consecutive close in 1998? Stocks tacked on an additional 25% between point A and point B.

S&P500 Daily 1998 Chart 2


Does The Bigger Picture Have Bullish Characteristics?

This week's stock market video takes a broader look at the market's risk-reward profile.


2010 - The Rally Continued

After the 2010 "flash crash" correction, the S&P 500 was unable to post twelve consecutive daily closes above its 200-day moving average until mid-September.

S&P500 Daily 2010 Chart

What happened after the twelfth consecutive close in 2010? Stocks tacked on an additional 17% between point A and point B.

S&P500 Daily 2010 Chart 2


2011 - The Rally Continued

Calendar year 2011 saw numerous events that were similar to 2015; a consolidation period, a sharp plunge, a double bottom, and a rally back above the 200-day moving average. The twelfth consecutive daily close above the 200-day did not occur until early 2012.

S&P500 Daily 2011 Chart

What happened after the twelfth consecutive close in 2012? Stocks tacked on an additional 8% between point A and point B.

S&P500 Daily 2011 Chart 2


How Can We Use This?

Does history tell us what is going to happen in late 2015/early 2016? No, history can only speak to probabilities. In each of the historical cases above, once the S&P 500 posted twelve consecutive daily closes above its 200-day moving average, the rally continued and tacked on significant gains.


What About 1987?

1987 has some similarities and could be included in this analysis. We decided to omit it for two reasons: (1) the S&P 500 stayed below its 200-day moving average for seven months, which is quite a bit different than 2015 (two months), and (2) the negative slope of the 200-day was significantly steeper (more bearish) in 1987.

 

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