In case you haven’t noticed, I like to look at metrics, indicators, and charts that are not as widely watched by other market participants. Like my post on Spain last week, today I am going to make an exception. The 200-day moving average in the S&P 500 is one of the most watched technical levels in all markets across the world, so I wanted to give my interpretation of Friday’s breach of that level.
Here’s the chart of the S&P 500 since the March 2009 lows, plotted with the 200 day moving average:
During this 3 year bull run, there have been 3 extended periods where the index stayed cleanly above the 200 day MA. The first lasted from Jul 2009 to May 2010, a 10 month period at the end of which the market was up by more than 200 points (from 878 to 1095) when the index touched the 200 day MA again (on the flash crash day). The second period was from Sept 2010 to June 2011, a 9 month period at the end of which the market was up by almost 150 points (1116 to 1258) when the index touched the 200 day MA again. The final period ended on Friday, and lasted from Jan 2012 to Jun 2012, a 5 month period at the end of which the market was up a mere 25 points (1259 to 1284) when the index touched the 200 day MA again.
My main point in showing this chart is to illustrate how the index is losing strength in both duration and height of move during each subsequent bull run. Perhaps more importantly, this trend has been even more exaggerated for other global markets (whether Europe, China, or other emerging markets), where the 200 day moving average for all of those markets is now firmly downward sloping. This year, most of those markets only stayed above the 200 day MA for 2-3 months before moving below it in April or May.
I am not the type of trader who subscribes to hard and fast rules around trading lines or levels (like the 200 day MA). But I do pay attention to the gradual, broader shifts that those levels can indicate. In the case of the 200 day MA, I see a market that is offering fewer and fewer gains to the bulls on each bull run, and Friday’s breach is just further confirmation to me that the bulls are the weak hands in this market right now.