Short-term Outlook (1-5 Days):  Neutral  Since June 24, 1067 SPX

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Equity Indicators - Updates and Extremes

S&P 500 Moving Average Rollover

Yesterday, we took a look at a looming crossover in two long-term moving averages on the S&P 500.  On a weekly basis, the 10-week average is about to drop below the 30-week average, which has been a fairly decent warning sign of trouble going forward.

In a somewhat similar vein, Bloomberg ran an article yesterday extolling the virtues of using the 150-day moving average as a marker of good and bad markets.

I don't want to turn this into a place to stress-test common market indictors, but we're lacking any new notable extremes among our intermediate-term guides.  And when we see something like this in the press, it often behooves us to figure out whether there's anything to it.  So let's check.

The article didn't explain what was meant by the 150-day average "flattening out", but for longer-term moving averages I usually use the one-month Rate-Of-Change.  We can see in the chart above that the 150-day average looks close to crossing below zero, meaning that the line would be lower than it was a month ago.

Let's go back to 1928 and see how the S&P 500 fared going forward when the 150-day average first starts to slope downward, and compare it to any other random return:

Actually, the S&P didn't do that poorly.  Out of the 61 "sell" signals, the majority of them led to positive returns during the time frames studied.  In fact, the S&P's average return was actually higher than random across every time frame, though the percentage of time it sported a positive return fell below random after a month.

Let's take a look at this a different way.  The table below shows the S&P's performance over the next day, week, two weeks and month when the 150-day average is either sloping up or down.  According to the Bloomberg article, there should be a stark difference between the two sets of figures.

In reality, there wasn't really too much of a gulf between them.  Yes, you had a better chance on the long side if the 150-day average was rising, especially the longer out you look, but it wasn't exceptionally wide.  And except for the next day's return, you had a better than 50/50 shot at having a positive return either way.

Overall, looking at the slope of the 150-day and the crossover of the 10-week average below the 30-day average, the S&P's prospects do seem dimmer than they would be if those systems were pointing higher.  But it's important to understand that these systems have many whipsaws, and while they do catch the major bear markets, more often than not they turn down just as stocks are about to turn back up.

It may be prudent to reduce risk when they give sell signals, but as for selling short...that's putting more faith in them than they deserve.

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