The S&P 500 hit a one-month low on Wednesday. It has now fallen 3.6 per cent from its record high in May – which isn’t exactly jaw-snapping, but bad enough to mark its biggest setback since November.
Perhaps more alarming, a drop of just five more points will send the index below its 50-day moving average, a technical level that will no doubt raise concerns that there are more declines to come.
Recent history, though, suggests that these concerns are overblown. Indeed, the concerns have been buying opportunities: The two previous times that the S&P 500 breached its 50-day moving average have marked its low point; it rebounded soon after.
The last time the index fell below its 50-day moving average was on April 18. Then, Reuters wrote that the technical level gave “more weight to views that the market’s recent rally is losing momentum.” However, the S&P 500 rebounded by 8.3 per cent by May 21, hitting a record high.
The index also slipped below its 50-day moving average on Dec. 27. Soon after, it embarked upon a 9.2-per-cent rally by Feb. 19.
Sure thing, this technical level can sometimes indicate trouble ahead – but again, recent history suggests that the trouble isn’t so bad. When the S&P 500 fell below its 50-day moving average on Oct. 22, it kept on falling – for another 5.6 per cent. If you had bought the index when it breached the technical level and endured that subsequent decline, you would now be up more than 12 per cent.