Where Does the 200-Day Moving Average Say We're Headed?

March 25th, 2013

by Chris Turner

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Last week on TV, one of the pundits spoke about how far the S&P 500 Index rested above the 200 day moving average. Always willing to place present conditions into perspective, I thought some charts might assist us in determining our current levels and putting them in some historical context.

Based on some some quick calculations with data readily available from Yahoo Finance, the first chart simply shows the S&P 500 Index relative to the 200 day simple moving average. The chart reflects the percentage distance of the S&P from its 200 DMA.

The chart visually identifies areas that are rare, such as March of 2009, when the S&P 500 Index was nearly 40% below the 200 DMA. Also, one may see that the 200 DMA does not spend much time above or below 10% away from the index.

Let's reduce our timeframe to look at the shaded area starting in 1985.

A red bar on the chart designates the S&P Index at 8.9% above the 200 Day. The chart shows that the S&P spends a predominate amount of time below the 10% level.

Moving in just a bit closer – specifically afer Greenspan's reference to "irrational exuberance" – one may determine from the following chart the last 2 bubbles and the relationship to the 200 DMA.

The red bar again denotes the current level of the S&P above the 200 DMA to provide context for the rare times when the index moves that far from the 200 DMA.

The following chart actually places the S&P 500 index and 200 DMA over the previous chart to see if any information can be gleaned.

For anyone looking for timing entrances and exits, perhaps the above chart might help, but another thought occurred to me during my research. What about showing all the occurrences when the S&P was above the current level (8.9% above the 200 DMA) to see what happens afterward?

This next chart depicts in a shaded bar all the times the S&P 500 was above the current level against both the 50 day and 200 day moving averages since 1983.

The following chart shows the S&P 500 Index with the 200 DMA with the shaded bars.

Although the above chart begins in 1983, readers may see that the S&P can be above the 200 DMA for long periods of time. Most of the occurrences result in a pullback, but on a long-term horizon, those are hard to see.

The last chart shows the time period post "irrational exuberance" again, with the shaded bars against the S&P 500 Index and 200 DMA.

The blue arrows show definitive times when a pull-back occurred when the S&P traded this far above the 200 DMA (except the far right arrow, which is just my guess). Although the 2000 and 2007 tops had very few days at this same level, the symmetry deserves some recognition. Both occurrences resulted in the S&P 500 trading back to the 200 DMA (currently just over 1400) and chopping for months prior to the eventual selloff. For the current environment to follow the same course, we would see an initial pullback to the 200 DMA with possible multiple re-tests of the current level before sliding below the 200 DMA.

However, in light of "QE Infinity" I'd be reluctant to call a top here and place a bunch of short positions.

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