Markets

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

The U.S. stock market started the week calm, but there's more going on beneath the surface than many investors may realize.

Technical analysts are fixated at the moment on the 200-day moving average in the S&P 500. The index is hovering right at the long-term trend line, which represents the average closing level for the last 200 sessions.

Turning Point
The S&P 500's 200-day moving average started sloping downward in August
Source: Bloomberg

As the chart above shows, the index dipped far below the trend line during both of the recent spasms of volatility, first last August and then at the beginning of 2016. The S&P 500 obviously had a tough time remaining above the trend line from late October to late December.

What's most notable is that when the market swooned in late August, the losses were enough to pull the 200-day moving average itself down. And a downward sloping trend line can be a scary sight.

When the stock market is rallying strongly, it obviously pulls the 200-day moving average higher. Prolonged weakness pushes it lower. In strong markets, the 200-day line acts as a "support" level that tends to help stocks rebound from a short period of weakness. When it's in a prolonged downward-sloping phase, however, it acts as a "resistance" level that can tend to thwart any potential rebounds.

Take a look at the S&P 500 going all the way back to the late 1990s, far enough to capture the last two major market cycles:

Toeing the Line
The S&P 500 tends to stay above its 200-day average during bull markets but below it in bear markets
Source: Bloomberg

Note how the line representing the S&P 500 tends to stay above the 200-day moving average during bull markets, with only brief dips below it. During bear markets, however, the opposite is true.

So here we are with a 200-day moving average that's fallen more than 60 points since August. The S&P 500 was able to close above it on Friday, but only by about four points. A failure to remain above it on Monday and in the near future may reinforce concerns that the long-term trend is going to continue to be weakness and that the downward-sloping line that was formerly support will continue to be resistance.

Is it really that simple? Of course not. Big shifts in fundamental information coming into the market can obviously move stocks swiftly and make any nascent chart trend vanish quickly. The Federal Reserve's announcement on Wednesday certainly has the potential to do that, should the central bank tell traders what they want to hear.

Still, it would be a mistake to dismiss the S&P 500's history with this trend line completely. It's pointed in the wrong direction, and it will take a strong and prolonged rebound to get it pointed back toward the skies.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net