S&P 500 200-Day Moving Average Is Pointing Lower, What’s Next?

Today’s post is from my good friend Ryan Detrick. He had some unique thoughts and stats on the 200-day moving average, Thank You Ryan for your contributions.

We hear a lot about the S&P 500 and its 200-day moving average.  It is trading above or below this long-term trendline?  I’ve long said what matters more is the overall trend of the 200-day moving average.  With that, as of August 21, the 200-day moving average for the S&P 500 has started to point lower.  In other words, is the bigger trend now lower?  Trend followers would probably make that argument.  So I decided to take a closer look.

Here’s a chart going back to 1928.  Again, the 200-day moving average is officially pointing lower and has been for nearly three weeks.

CLICK ON CHART TO ENLARGE

The 200-day moving average had been trending higher for an incredible 870 days.  The streak started clear back in March 2012 and was the second longest streak of a higher trending 200-day moving average ever.  I wondered what happened after long streaks ended.  Starting in ’28, there were seven previous times the 200-day moving average was pointing higher for more than 500 days.  As you can see below, the returns after are very poor.  Down 8% on average a year later and flat two years later are very weak returns.  Even going clear out five years, the average gain is only 16%.  Considering the average return with dividends is about 10% a year, this could suggest very weak returns going out several years.

CLICK ON CHART TO ENLARGE

Next I broke things down several different ways.  I was surprised that above (or below) the 200-day moving average produced more (or worse) results than the way the 200-day was trending.  I always thought the trend mattered more, guess just being above or below is more important.  Lastly, I looked at what happened when the S&P 500 was above (or below) the 200-day moving average and it was trending higher (or lower).  What is worth noting here is the returns when it is both below the 200-day moving average and the trendline is pointing lower, the returns are pretty poor.  This is what is happening now, a lower 200-day moving average and beneath the long term trendline.  Also this scenario produces the largest standard deviation.  So wild moves are the norm.  Sound familiar?