Not a Real Bear Party Until S&P 500’s 200-Day Average Is Broken

They say it’s not really a party until something gets broken, and it’s not really a proper freakout in stocks until the 200-day moving average is busted.

So far, despite huge losses in some of the bull market’s highest-flying shares, the main benchmark indexes remain above that long-term trend-line, which, of course, is where you want them to be. Today, they’re rising even further above.

The 10-day through 100-day averages all bit the dust last week for the Standard & Poor’s 500 Index, Dow Jones Industrial Average and Russell 2000 Index (RTY) as well as for the Nasdaq Composite and Nasdaq 100 indexes.

The Russell 2000 right now is like a party guest wearing a lampshade on its head -- the prime suspect to break the 200-day average first. The benchmark index for smaller companies, with a median market value of less than $1 billion, closed last week about 0.5 percent above its average from the past 200 days. The Nasdaq indexes each ended about 2 percent above while the S&P 500 closed about 3 percent higher and the Dow finished the week 1.7 percent above its 200-day line.

The Russell 2000 is likely to touch the 200-day trend line this week and the S&P 500 may follow in the coming weeks, according to a report dated yesterday from technical analyst Jonathan Krinsky at MKM Partners LLC.

However, this may not necessarily mean it’s time to start stocking your bunker with canned goods and ammunition. The S&P 500 has not tested its 200-day moving average since November 2012, the longest stretch in 15 years and 10th longest since 1928, according to Krinsky, so it was due for a freakout like this.

Some Perishables

The returns following a dip below the 200-day moving average -- after a prolonged period above it -- may still make you want to duck into the bunker for a bit while the bears prowl about, but if you do you can probably get away with just a few perishables. The S&P 500 has lost almost 3 percent on average in the following week and 0.5 percent in the following month, yet was 1.8 percent higher in three months and 3.3 percent higher in a year, according to Krinsky’s analysis of the nine longest streaks above the 200-day average.

While the returns after six months have been negative, they are skewed by brutal bear markets in 1937 and 1946, according to Krinsky.

There’s another trend line that may offer support for the S&P 500 before it gets to the 200-day moving average, according to William Maloney, a technical analyst with Bloomberg First Word. Maloney draws a line connecting the S&P 500’s low points starting at the end of 2012, not long after the last test of its 200-day average. That has him looking in the ballpark of 1,795 as a potential place for buyers to come in and stop the bleeding. If that fails to hold, then the next target to watch is the 200-day average at 1,761, he said.

“Basically I want to see the S&P 500 stay above 1,800 before I start to get worried,” he said.

So stay out of the bunker for now. It’s too nice outside anyway.

To contact the reporter on this story: Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net Jeremy Herron, Jeff Sutherland

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