Apple Inc. has fallen about 22 per cent from its record high in September – even with Friday’s modest rebound – which fits the description of a bear-market decline. Its influence is now being felt on the S&P 500, where the benchmark index is flirting with a technical threshold of its own: It fell below its 200-day moving average on Thursday, which is seen as a key bearish indicator by some market watchers, but then rebounded slightly above it on Friday.
The fear is that when an index dips below the 200-day threshold, it will keep falling. It doesn’t always, of course. In the most recent example, the S&P 500 fell below its 200-day moving average in early June but then immediately rebounded nearly 15 per cent by September. In August 2011, though, the index fell below its moving average and continued to fall another 14.6 per cent by September.
So, should you care now?
Ron Meisels, chief technical analyst at Phases & Cycles in Montreal, believes the technical breach is no reason for investors to panic. For one thing, he argues that the direction of the 200-day moving average is more important than a dip below it – and the direction continues to rise even as the index falls.
For another, a variation of the 200-day moving average – which weights recent market activity more heavily than past activity – shows that the S&P 500 remains above the moving average.
“The market has been in a corrective mode since its high in September, so it is not a surprise that the market is selling off and approaching its 200-day moving average,” Mr. Meisels said. “We should have a bounce from here.”
Still, there are good reasons why this technical indicator is watched so closely. Mark Hulbert at MarketWatch looked at its historical performance and found that it has an impressive long-term track record – but the record has diminished in recent decades.
In June, he constructed a hypothetical portfolio based on the moving average, using historical data for the Dow Jones industrial average: He was fully invested when the index was above the 200-day moving average, and was entirely out of the index when it fell below the moving average.
If an investor had simply bought and held the index over a 115-year period, he or she would have scored an annualized return of 5 per cent. But using the moving average as a signal to either get out of, or move in to, stocks, the investor would have boosted his or her annualized return to 6.6 per cent. These numbers ignore dividends and interest earned on cash.
But since 1990, the moving average indicator hasn’t performed nearly as well – probably because too many investors have been using it as a market-timing signal. Indeed, the buy-and-hold approach now has an edge.
In early afternoon trading on Friday, the 200-day moving average appears to be holding. The S&P 500 rose to 1387, or about 6 points above the moving average.