Posted by Adam Turnquist, CMT, VP Chief Technical Strategist
Friday, November 11, 2022
The S&P 500 has been stuck below its 200-day moving average (dma) for a statistically long time. History suggests the path to recapturing the 200-dma may require more time with additional downside risk. However, after the index has been contained below the 200-dma for extended periods comparable to today, forward 52-week returns for the S&P 500 have historically been bullish.
Background
The 200-dma is one of the most commonly used tools in technical analysis. It provides investors with a longer-term perspective on trend direction as it helps smooth out the day-to-day volatility of price action. In general, if price is above the 200-dma, a security is considered in an uptrend, especially if the 200-dma is rising. On the flip side, if price is below the 200-dma, a security is considered in a downtrend, especially if the 200-dma is declining. The 200-dma can also be utilized as a risk management tool given its dynamic support and resistance attributes.
Applying these general rules to the S&P 500 implies the broader market has been in a downtrend for most of the year. The last time the S&P 500 crossed below its 200-dma was on April 8, 2022, leaving the index below the 200-dma for 149 consecutive trading days (as of November 9, 2022). For historical context, a streak of this duration or longer represents nearly a 95th percentile reading.
While understanding the S&P 500 has been below its 200-dma for a long period provides context on the underlying trend, it does not help answer the important question of what may happen next. To answer that question, we used history as a guide and researched prior periods when the S&P 500 held below its 200-dma for at least 149 trading days. The table below provides a summary of our research.
Summary
Acknowledging the data is limited, comparing the current period to the historical data above suggests the S&P 500 may require more time to recapture the 200-dma. In addition, the current max drawdown of 19.6% is roughly 5%-6% below the average and median drawdowns recorded during the prior timeframes. This does not imply history will repeat, but it does highlight the potential for additional downside risk.
Finally, longer-term returns after the index has been contained below the 200-dma for 149 days suggest there is a light at the end of the tunnel. Average and median 52-week forward returns for the S&P 500 have been 13.6% and 17.8%, respectively, with nine out of 12 periods generating positive results.
Additional Facts Related to the S&P 500’s 200-dma, based on data since 1950:
- The S&P 500 has traded above the 200-dma during 71% of all trading days.
- The S&P 500 has traded at an average premium to the 200-dma of 3.2% across all trading days.
- When the index is above the 200-dma, it has historically remained above it for an average of 131 trading days. During this time, the S&P 500 has traded at an average premium to the 200-day of 7.0%.
- When the index is below the 200-dma, it has historically remained below it for an average of 80 trading days. During this time, the S&P 500 has traded at an average discount to the 200-dma of -6.3%.
- There have been 209 bullish crossovers, classified as price closing back above the 200-dma. Forward six and 12-month returns following each crossover averaged 4.8% and 7.7%, respectively. When filtering for crossovers above a rising 200-dma, the average six and 12-month returns were 4.0% and 5.7%, respectively.
- There have been 213 bearish crossovers, classified as price closing back below the 200-dma. Forward six and 12-month returns following each crossover averaged 4.3% and 6.9%, respectively. When filtering for crossovers below a declining 200-dma, the average six and 12-month returns were 5.4% and 11.3%, respectively. While these statistics may appear counterintuitive, a declining 200-dma also implies investors have likely already discounted a large degree of downside risk. It is also important to remember the market’s long-term tendency to advance over time.
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