Today, The Wall Street Journal ran a column entitled, “Some See Warnings, Some Shrug” that discussed both the risks from both a technical and sentiment backdrop. From a technical perspective, the S&P 500 Index (SPX) was discussed. One quote that particularly caught my eye in this article was,
“The index is nearly 10% above its 200-day moving average, a reading that some say warrants concern. The three times that has occurred in the past three years, stocks have tumbled shortly thereafter, says Dan Greenhaus, chief global strategist for BTIG.”
The SPX has indeed pulled back after such a signal during the short period observed above, but given that historical SPX data goes back well beyond three years, I asked Rocky White, our Quantitative Analyst, to study the market from the above perspective with the SPX data that we have, which dates back to 1973. With more data, we are better able to quantify the “too far, too fast” concern as quantified by the SPX trading 10-percent above its 200-day moving average.
The tables on the left break down SPX returns after the “sell signal.” On the right are the SPX’s “at anytime” returns since 1973 to give you additional perspective. The second set of tables displays the returns if you exclude the returns of the 1990′s, which most of us remember as a run-away bull market and skew the data in favor of the bulls.
The research suggests that the “too far, too fast” concern, as quantified by the SPX trading 10 percent above its 200-day moving average, is not as great of a risk as it appears on the surface. Historical data, excluding the 1990′s, suggests the potential for underperformance, but that is about as bearish as it gets.