The rally that drove the Standard & Poor’s 500 Index up 20 percent since October fizzled after it failed to remain above its 200-day average for a second time.
The benchmark gauge for U.S. equities fell 3.7 percent to 1,229.10 yesterday, dropping below its average in the past 200 days, as surging Italian bond yields spurred concern Europe’s crisis is intensifying. One out of 500 stocks in the index rose, the fewest since June 2010. The measure closed above the 200-day level on two straight days at the end of October, following the biggest monthly rally since 1991, and again on Nov. 8.
Equities surged worldwide starting in the first week of October on optimism European leaders would solve the crisis, driving the S&P 500 out of a price range where it had been stuck since the start of August. Price indicators such as the stock index’s average price are captivating investors, said Brian Barish of Cambiar Investors LLC.
“The S&P 500 failed to break the 200-day and Italy’s debt yields really blew out, so you have a panicky reaction in the marketplace,” Barish, who helps oversee about $8 billion as Denver-based president of Cambiar, said in a telephone interview yesterday. In early October, “the market was poised to rally on almost anything, and it did,” he said. The 200-day average is “where it ran out of gas.”
The S&P 500 fluctuated between 1,074.77 and 1,230.71 from Aug. 5 to mid-October, before speculation European leaders were nearing agreement on bailing out Greece drove the measure as high as 1,292.66 on Oct. 27. The index closed at 1,285.09 the next day, also above the 200-day level. It rose 0.9 percent to 1,239.70 today.
It closed above the 200-day average on Oct. 27 for the first time since Aug. 1, pushed higher by Europe expanding its rescue fund to 1 trillion euros ($1.4 trillion). The gauge stayed below its 200-day average from Aug. 2 through Oct. 26, the longest streak since the 358 days ended May 29, 2009, Bloomberg data show.
The index recovered after sinking to 1,074.77 during the trading session on Oct. 4. Using closing levels, the S&P 500 was 14 percent below its 200-day average on Oct. 3, the most since April 2009, according to data compiled by Bloomberg.
The average is “a longer-term, well-defined trend line” and the S&P 500’s failure to stay above it is “disappointing,” according to Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research in Cincinnati.
Yesterday’s drop below the 200-day level coincided with the benchmark’s first sell signal on its Moving Average Convergence/Divergence line chart since September. The MACD line, calculated by subtracting the S&P 500’s average level during the past 26 days from the average over the past 12 days, fell yesterday below the “signal line” that plots the 9-day average difference between the two.
“MACD essentially highlights momentum shifts,” Josh Dollinger, a New York-based managing director of BTIG LLC, said in an e-mail yesterday. “This would change the medium-term theme from ‘buy dips’ to ‘sell rallies’ until we can close back above the line.”
John Kattar, chief investment officer at Eastern Investment Advisors in Boston, said he’s not concerned about the S&P 500’s second failure to stay above the average.
“It’s not unusual for markets to take out important resistance levels and come back and retest, almost like a fake-out, but then go on and re-challenge them again and ultimately break through on a second or third attempt,” Kattar, whose firm manages $1.7 billion, said in a telephone interview yesterday. “The market has the potential to grind higher, to take out the 200-day moving average.”
The inability to break past the level, coupled with Italian bond yields surging to euro-era records, has hurt investor confidence in the market, Detrick said.
“It makes sense to have some kind of pullback or consolidation near the 200-day,” he said in a phone interview yesterday. Yesterday’s decline “is a rather extreme move and puts into question the overall recent upward trend.”