Meaning: When the Dow and S&P 500 fall below this important level of support, stocks typically return roaring

Breaking the 200-day moving average is not the death knell for U.S. stocks, which may explain why the Dow Jones Industrial Average DJIA,
-1.18%
on January 24 recovered from a 1,000-point dive and ended up for the day. It was only late last week when both the Dow and the S&P 500 SPX,
-2.07%
exceeded their respective 200-day moving averages – by many stock market technicians considered to indicate that the major trend of the market has slowed down.

The historical record does not support this bearish interpretation. The US stock market has historically not performed worse after falling below the 200-day moving average than it does at any other time.

To show this, I analyzed the S&P 500 (or its predecessor index) back to the mid-1920s. I focused especially on all days where the index first fell below its 200-day moving average. As you can see in the table below, the S&P 500’s average return in the wake of such days was slightly better than on all other days.

Ssubsequent month

Subsequent quarter

Subsequent 6 months

Next year

200-day moving average sell signals

0.7%

2.3%

4.6%

8.2%

Every other day

0.6%

1.9%

3.7%

7.7%

Moreover, none of the differences reported in this chart are significant at the 95% confidence level that statisticians often use when determining whether a pattern is genuine.

The last 30 years

You may worry that the story told by this chart is skewed by experience many decades ago and is not as relevant to today’s market. In fact, the pattern shown in the table would be even more pronounced if I had only focused on the last two or three decades. This is not an accident that I have discussed in previous columns. This is exactly what you would expect given the emergence of easily and cheaply traded exchange traded funds that are benchmarked for the S&P 500 (or other benchmarks in the broad market).

Take a look at the chart above, which plots the S&P 500 over the past decade along with its 200-day moving average. Note that when the S&P 500 has fallen below its 200-day moving average, more often than not over the last 10 years, it typically reversed the course and rose.

There is no guarantee that the same thing will happen this time. In fact, the current outlook for the stock market may be bleak. The point is that its outlook is not worse just because the 200-day moving average was breached.

Mark Hulbert is a regular contributor to MarketWatch. Hans Hulbert Ratings tracks investment newsletters that pay a fixed fee to be audited. He can be met at mark@hulbertratings.com

More: S&P 500, Nasdaq has just staged a turnaround through the ages, marking their biggest comeback since the financial crisis in 2008

Also read: Stock market investors can not count on ‘Fed put’ – why policy makers are not seen rushing to save

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