Wall Street hailed the S&P 500 SPX’s rise over its 200-day moving average last week as evidence that the main trend of the US stock market is now upward, despite price volatility and uncertainty.
The only issue is that this optimism is unsupported by history.
The S&P 500 (or precursor index) since the mid-1920s was examined in order to determine the significance of closing above its 200-day moving average. In other words, I concentrated on all trading days when the index ended above its 200-day moving average after closing below it the day before. This is known as a 200-day moving average buy signal. The average returns of the stock market after these buy indications are summarized in the accompanying graphic.
No discernible pattern exists. The U.S. stock market generated marginally above-average returns during the next one-, three-, and six-month periods after 200-day moving average buy signals. Over the next 12 months, it was exactly the opposite.
All of the changes were negligible, at half a percentage point or less, and none of them were significant at the 95% confidence level that statisticians frequently employ to determine the significance of a pattern. Furthermore, the differences net of transaction costs are probably considerably lower because these calculations do not account for transaction costs.
Keep in mind that these findings do not imply that the stock market will have a bad week or month. Rather, these findings imply that there is little reason to believe that stocks will perform better than they otherwise would have if the S&P 500 had not closed above its 200-day moving average.
Consider the behavior of the stock market from now until June 12, one month after the S&P 500 first closed above its 200-day moving average, as an example. On June 12, the index will be trading at 5,898.97 if it increases by the average gain over all month-long periods since the mid-1920s.
The S&P 500 will be trading at 5,928.27 on June 12 if the index increases by the average amount it did following all previous 200-day moving average buy signals.
You might come to the conclusion that, even if the difference were statistically significant, it wouldn’t be sufficient to support a meaningful shift in your portfolio.
The bottom line? The stock market’s current position in relation to its 200-day moving average is not the most important thing to consider.
