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Quick Update On Distance From 200 Moving Average at Trader’s Narrative

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:

distance from 200 MA SP500 Mar 20101

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:

SPX 20 pct above 200 day MA historical study update

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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6 Responses to “Quick Update On Distance From 200 Moving Average”  

  1. 1 biscosc

    A question I’ve been pondering lately.. Why does everyone want to fight the tape? Is it because they want to look smart for getting the call right? There better be some d@mn good reason to do it, I’m thinking inverted yield curve PLUS EXTREMELY bullish sentiment (not like we have now) PLUS a factor such as you are writing about now. Otherwise it’s just not worth it to try to catch these 5-8% pullbacks.

  2. 2 Babak

    biscosc, good question. I think it is just too good to be true. Or it seems that way. Plus it is hardcore to go against a trend and be right. Only sissies go with the trend ( :/ joking).

  3. 3 jezza

    Babak, any thoughts on if the % away from the 200ma applies to stocks as well?TIA.

  4. 4 Wayne


    I’ll take a 5 minute shot at answering your two questions. This is just one man’s opinion.

    First concerning why people fight the tape.

    1. It is human nature to think ‘inside’ the box, to think in terms of limits such as trading ranges. This is the intellectually lazy approach to trading.

    re, trading ranges, If you look through past charts, you will see that the market, does in fact peak and bottom often at old highs and lows. What you don’t see in the charts are the multitude of times that we retested old highs and lows and blew through them in both directions. These points don’t jump out at you in hindsight.

    2. The S&P has returned 11.5% a year since 1970, through buy and hold. Everyone dreams of turning that into 20% a year with some additional market timing. Those who can do so, are held in high esteem. Those who have the confidence to successfully leverage their conviction are considered genius. Most people yearn to be in the class of humans held in high esteem.

    3. It is human nature to want to take profits, for it is at that time, we can remove some risk from our life and pencil in our level of intelligence.

    To answer your other question, concerning legitimate reasons to move to the sidelines. Historically, from my knowledge of the history of equities the following have been reasonable reasons.

    1. A very unaccomodative Federal Reserve 73-74, 80-82’s, 1987.

    2. A very overvalued market (how to value is subj to interpretation), but 99-02 meets the criteria from most any valuation criteria.

    3. Your negative yield curve. 66, 69, 73-74, 78-82, (Related to 1 above).

    4. A shrinkage of available capital to chase stocks, which can often be guesstimated by measures of sentiment,

    5. Realistic expectations of a shrinking economy (2007-2008).

    6. Deflation, (depression), related to 5 above.

    7. Excessive selling by an inordinate number of people who are in the know, insider trading by company execs, or market timers with 30 years of successful experience timing the market such as Ned Davis, Zweig, Lowry, Peter Lynch, Buffett types.

    8. Converse to # 8, Excessive buying by inepts, usually measured by the retail public. If your shoe shine boy is giving out stock tips, beware.

    A ratio of a measurement of 7 to 8, would be very informative.

    9. From my vantage point, unfriendly tape action, (details require some development, which I may elaborate on sometime)

    I think you could show every bear market has had at least N of the above at some point in the bearish cycle. To pursue such research would be a very worthwhile endeavor for someone with the support resources to do so.

  5. 5 Babak

    jezza, yes, check this out: unconventional use of moving averages

  6. 6 biscosc


    I completely agree with your reasons. I think people would have a better chance of achieving #2 with less trading not more. I’d also add the reason that going with the trend is very boring and does not have that excitement that most traders crave. I think in most cases the smallest amount of financial information intake the better. That’s why I try to limit my intake to the best blogs around like Babak’s. :)

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