S&P 500’s Gap to 200-Day Approaching Peaks: Technical Analysis

The rally in U.S. stocks has driven the distance between the Standard & Poor’s 500 Index and its 200-day average toward peak levels that have coincided with the start of the biggest annual retreats in the last three years.

The benchmark gauge of American equities climbed to a record 1,632.69 on May 8, 11.2 percent above its average price in the past 200 days. That was the widest gap since April 2012, when the index started a 9.9 percent slide through June 1, the worst drop of the year, according to data compiled by Bloomberg. In 2010 and 2011, the biggest declines each year began with the S&P 500 trading more than 11.7 percent above its 200-day average, the data show.

The gap “speaks to the velocity and steepness of the current rally,” Joshua Dollinger, chief technical strategist at BTIG LLC in New York, said in a phone interview yesterday. “And you never want to go too far, too fast. You could need a little digestion to play catch up.”

The S&P 500 has climbed 14 percent this year as the index posted the sixth consecutive monthly increase in April, the longest streak since 2009. The share gains have kept the benchmark above its 200-day average for 118 days going back to Nov. 16, data compiled by Bloomberg show.

The stock market may avoid past slumps that have been accompanied by the S&P 500’s rise above its 200-day average because the rally to all-time highs showed momentum is building, according to Katie Stockton, chief market technician at Stamford, Connecticut-based MKM Partners.

‘More Extreme’

“If momentum is strong, as it is now, this condition can be sustained or get even more extreme,” Stockton wrote in an e-mail yesterday. “It doesn’t mean the market won’t pull back, just perhaps from a higher level.”

The S&P 500 rose above its 200-day trend line during the initial stages of the bull market, with the gap at least 12 percent most of the time during the six months that started in July 2009. The moving average reached 20.6 percent higher than the index in October that year, the data show.

The bull market in U.S. equities is in its fifth year as the S&P 500 surged 140 percent from its bottom in 2009, driven by better-than-expected corporate earnings and an unprecedented three rounds of bond purchases by the Federal Reserve to stimulate the economy.

Last year, the index strayed 11.9 percent above the average before its worst slump began. The index was 11.8 percent above its average when it reached its 2011 high on April 29. It then tumbled 19 percent through Oct. 3. In 2010, the gap was 12.4 percent on April 23 when the index started a 16 percent drop through July 2, data compiled by Bloomberg show.

“It certainly is concerning when looking to add new long positions at current levels,” Jonathan Krinsky, chief technical analyst at Miller Tabak & Co., said in an interview yesterday. “2013 is either at the end of a short secular bear market, or the beginning of a new secular bull. In our view, it is too early to make that call at this juncture.”

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