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What Happens This Far Above The 200 Moving Average? at Trader’s Narrative

When you take a step back and get a very long term perspective on the stock market, you realize that an apt analogy is a dog pulling on its leash. There is an overarching trend - which is the path set by the owner - but like a distracted puppy, the market can pull in one direction for short, intense spikes.

By watching the relative distance to its moving average we can tell where we are and how probable it is that we revert back to the very long term trend. This is what I referred to when I built a case for being bullish in March 2009: Another Reason We’ve Seen the Market Low. To my shock and horror, on November 20th 2008 the S&P 500 closed almost 40% below its 200 day moving average. It had never done that in the entire history of the index!

And in keeping with every other similar spike down, 60 days later, the index had recovered. In fact, we saw the sharpest rally to match the never before seen spike low.

We’ve now come full circle and are at the other end of the extreme. Last week, the S&P 500 closed 20.27% above its 200 day moving average. To give you an idea of how rare this is, here’s a chart of the S&P 500 relative to its long term moving average from 1950 onwards (click to see the larger version open in a new window):

SPX relative to 200 moving average long term chart

Not only have we never seen this measure sink so low, we’ve also never seen it recover so fast! It took only 206 trading days for the S&P 500 to go from being 39.79% below its 200 day moving average to being 20.27% above it. The only other time we saw a similarly quick lurch from the abyss to the heavens was when bell bottoms and butterfly collars were the rage.

Back then, it took the S&P 500 only 185 trading days to go from being 28.8% below its 200 day moving average (on October 3rd 1974) to being 21.6% above its moving average (on June 26th 1975). That tidbit may be fascinating to know but I’m sure you’re wondering, so what happens when we are this far above the 200 day moving average?

To answer that, I went through the daily S&P 500 data and marked the appropriate dates where we approached or crossed the 20% Maginot line. Since such instances tend to clump together, I only considered the first date and ignored the repeats during the same month.

So for example, on May 5th 1975, the S&P 500 traded at 90.08 which was 19.66% above its 200 day moving average. Then a few days later on May 9th it closed slightly higher relative to its long term moving average (20.10%). I ignored all such repeats. I then calculated the forward 1 month, 3 month and 6 month returns (excluding dividends) from the first date. Here are the results:

SPX 20 pct above 200 day MA historical study

The first thing you’ll notice is that there are very few examples: only 15 out of almost 15,000 trading days!

This is partially because of how I ignored repeat occurrences within a month. But a much more significant reason is that the market grinds out important tops slowly. Go back and look at the October 2007 top. It isn’t a spike. The S&P 500 petered out as it lost leadership and momentum. In contrast, bottoms are forged in the hellfire of fear and panic, leading to sharp spikes that pierce the chart like a needle.

As you can see, I also included a few ‘outliers’. These were times when the data was not as close to 20% but overall, it looked like a spike on the chart close enough to 20%. One of these outliers even caught the 1987 crash.

The data tells us that on average, the short term performance of the stock market when we are this high above the long term moving average is about -1%. That’s a return of approximately -13% annualized. The 3 month return is slightly worse while the 6 month return brings us back into the positive.

Not surprising. Especially when you consider everything else we’ve been looking at lately. In last week’s sentiment overview we saw how the option traders are extremely bullish. As well, yesterday we went over Lowry Research’s analysis of the market and their expectation for a correction.

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9 Responses to “What Happens This Far Above The 200 Moving Average?”  

  1. 1 Barry Ritholtz


    What made the collapse so fascinating form a technical perspective was how far oversold the markets got. We were down to 1% of S&P500 stocks were trading over their 200 day moving average

    I would be curious if we could separate the overbought conditions at the start of new bull markets (1980-82) versus bear market rallies (1973-74) —

    How do they look? Are they different technically?

  2. 2 Barry Ritholtz

    BTW, your email is bouncing (mailbox full)

  3. 3 wayne


    Compelling data, good research, hard to argue with.

    I do struggle to compare 87 to 09. 87 came after a five year bull market that started in 82 with a fed the had made 4 rounds of fed hikes in 87 and a Tbond yields that went about 10.02% on Oct 12th

    Ill, try to keep an open mind and I may study this more.

  4. 4 Pej

    Cool report indeed. I think the only conclusion is that the mean return is weak, but that the tails are very fat in this sample. Which means that the mean is meaningless?
    sorry for the pathetic pun. The conclusion is real though.

  5. 5 wayne

    Desmond has been doing this successfully for a long time and I hate to lock horns with him on this one, but I dug this study up that I did about a month ago. It shows SP performance after a 5 day 10% move in either direction and is probably very similar to the SP oscillator study we were discussing a couple of days ago It is relevant because both (Desmond and mine) studies are based on 5 standard deviation SP moves, mine over 5 days, Paul’s in relation to the S&P 200 day moving avg. My studies suggest that powerful thrust over short period of times are tremendously important. Again the proof is in the pudding. Lets see how it turns out.


    Four columns are
    1) sp% move over past 5 day period
    2) 63 day forward SP% move
    3) 126 day forward SP% move
    4) 252 day forward SP% move

    700601 12.34 5.16 10.39 27.99
    741010 11.95 4.04 20.62 26.62
    821011 10.23 9.16 15.38 27.03
    871019 -28.51 10.89 14.71 22.94
    871023 10.40 1.59 5.76 14.28
    871030 10.59 1.29 3.88 10.62
    980831 -12.38 21.52 28.22 37.90
    020723 -11.96 12.79 10.11 23.93
    020729 12.69 -0.15 -4.49 10.05
    021015 13.45 4.19 -0.15 18.78
    081007 -14.20 -8.99 -17.17 2.93
    081024 -11.02 -3.54 -2.46 16.95
    081031 14.12 -13.44 -6.70 5.85
    081119 -11.49 -7.84 9.97 27.13
    081126 17.97 -21.05 6.22 15.51
    090313 11.76 25.14 35.61 35.61

    # UP - # DOWN 10-6 11-5 16-0
    AVERAGE SP%CHG 2.55 8.12 20.26

  6. 6 Damien Hoffman


    I reposted this excellent piece as our trading feature today. Also, I emailed you … but it bounced back. You may consider using a gmail account while your other is having issues.

    Looking forward to your response.


  7. 7 Anonymous

    Brilliant, keep up the good analysis Babak

  8. 8 Chris Maye

    “The stock market is never obvious. It is designed to fool most of the people most of the time.”—Jesse Livermore

  9. 9 Reinko

    Nice statistics, after the biggest decline there is a wonderful spike up in the S&P500.

    It also looks like the spikes are getting bigger, so voila more real money to be made!

    We only have to wait a week or two for a next round of earnings in the S&P stuff, we’ll see how the green shooters fare…

    Barry notes the so called ‘oversold conditions’ at dates like 09 March 2009, from a statistical point of view this could be true.

    But even at market low there still was about 4 trillion US$ too much in the system preventing the economical stuff growth from getting real.

    Lets leave it with that…

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