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?
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.
What happened after the twelfth consecutive close? Stocks tacked on an additional
33% between point A and point B.
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.
What happened after the twelfth consecutive close in 1998? Stocks tacked on
an additional 25% between point A and point B.
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.
What happened after the twelfth consecutive close in 2010? Stocks tacked on
an additional 17% between point A and point B.
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.
What happened after the twelfth consecutive close in 2012? Stocks tacked on
an additional 8% between point A and point B.
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.
