Don't Place Too Much Trust in the S&P’s 200-Day Average, Says One Money Manager

  • Two bouts of selling this year have stopped at that threshold
  • Marketfield CEO sees bottom somewhere lower, closer to 2,500

Why Are Investors Watching the 200 Day Average?

For a second time this year, the S&P 500 Index managed to stay above a widely watched trend line: its average price over the previous 200 days. So is it time to celebrate the end of the two-month tumult in the stock market?

Nope, warns Michael Shaoul, chief executive officer of Marketfield Asset Management. There’s too much confidence that the average is a genuine barrier, he says, and the true market bottom is lower. The 200-DMA stood at about 2,590 Friday. Shaoul sees the index falling through to 2,500, about 5 percent below its current level.

“Unfortunately, support is a little bit like a ‘dive bar’; if you keep on revisiting it, eventually something bad happens,” Shaoul wrote in a note to clients. “The 200-day moving average has become something of an emotional crux in recent weeks and it may need to be removed to create the sort of wash-out that would signal the termination of this sharp decline lower.”

Shaoul’s conclusion is at odds with the judgments of chart watchers such as Chris Verrone at Strategas Research Partners and Jeff deGraaf at Renaissance Macro Research, who say the worst is likely over.

The last time the market failed to stay above the 200-day average, in 2015, the S&P 500 fell into back-to-back 10 percent corrections in six months. While stocks have suffered a pullback of similar size since January, it’s kept the trend line intact.

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