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Six months ago we looked at the S&P 500 index as it traded at a very rare and lofty level in relation to its long term trend: What Happens This Far Above The 200 Moving Average? On September 16th 2009 the S&P 500 closed more than 20% above its 200 day moving average, something it had not done in 12 years:
The market is like a rubber band. It expands away from a long term trend either to the downside or the upside, before snapping back. In early March 2009 the market was as deeply oversold (according to this indicator) as it had been for 60 years. Based on the few times the market was this far extended above its trend, I concluded that the short term upside would be limited (see the data table below). But I was proven wrong.
This time around the market totally ignored this and seemingly every other obstacle thrown in its way as it methodically inched higher:
The red arrow above points to the September 16th date. A little bit later, in October 2009, we had another signal when the market reached almost 21% above its 200 day moving average. Looking at the data now, I’m not sure there is an edge here. With these new data points, the short term is a toss up with positive and negative returns almost evenly split:
Inevitably, if you analyse the market enough you’ll run into your share of dead ends. This looked like a promising path but unless I’m missing something, I don’t think I’ll be relying on it as much as I wanted to. Right now the market seems to be climbing a classic “wall of worry”: unemployment, consumer sentiment, deflation, real estate collapse, etc. Take you pick. There are lots of reasons for the market to not go up.
But it does.
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