SPX returns are typically bearish when faced with a big comeback amid bullish sentiment
With lots of fanfare, the S&P 500 Index (SPX) closed above its 200-day moving average for the first time since pandemic fears crashed the market. The index spent 57 trading days below its moving average, from March 5th through last Wednesday. It was
its longest stint below the 200-day moving average since 2011. This week, I will break down a few different ways how the S&P 500 has performed after such long stretches below the popular level.
What Simple Breaks Above Mean
First, some general data on how the index has performed after breaking above the moving average for the first time in at least 50 trading days: Since 1950, there have been 22 prior signals. The returns have been better than normal in each time frame,
when looking at average return and percent positive. Six months after theses breaks, the S&P 500 averaged a 7.5% return, with roughly 73% of the returns positive. More than half of the six-month returns were double-digit gains.
Using the Context of Biggest Comebacks
The size of the deficit to be overcome is one of a few things setting the signal apart from others. In the middle of March, the S&P 500 sat 26% below its 200-day moving average. There were seven other signals where the index had been at least 20% below the moving average at one point, which are represented below. The most recent occurrence was also the biggest in S&P 500 history. At the height of the financial crash of 2008, the S&P 500 was about 40% below its 200-day moving average. Eyeballing those returns, the six month returns were in the double-digits in five of the seven occurrences.
The table below summarizes the data from above. The three- and six-month returns are especially impressive.
Sentiment is Bullish
Despite the 57 days below its 200-day moving average, sentiment on stocks is bullish, according to a survey conducted by Investors Intelligence (II), an organization that collects over 100 published newsletters and determines the percentage that are bullish,
bearish, or expecting a correction. The 35% gain since March 23 might warrant this optimism. The survey showed 50.5% bullish and 23.8% bearish, for a difference of 26.7%. Out of the 22 signals referenced at the beginning of this article, 18 of
them occurred after 1963, which is how far back we have data from Investors Intelligence. Of those 18, just three of the moving average crosses happened when the bulls were at least 20% above the bears. Those three occurrences are below. According
to our contrarian philosophy, bullish sentiment has bearish implications moving forward, which is what we see in the results below. After each one of these instances, the index was down 3.9% or more a month later, and down double-digits six months
later.
Because there are only three data points, this can be taken with a grain of salt. Regardless, the results do support the theory. Hopefully as the momentum continues, we can buck this trend.
