Can the S&P 500 Index Keep Up its Impressive Run?

We could be on the cusp of an extended bull market

Senior Quantitative Analyst
Apr 21, 2021 at 8:24 AM
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The stock market has turned in an impressive performance so far this year, which is obvious just by looking at the level of the S&P 500 Index (SPX). What’s more impressive, however, is the proportion of stocks participating in the rally. The chart below considers current SPX stocks, and shows the percentage trading above their 200-day moving average. It recently surpassed 95% for the first time since 2013. It’s typically considered a bullish sign when breadth is high during a rally, but can it be too high? Maybe we can determine if there’s an exhaustion point. Also, I’ll look at the breadth data a few more ways.

chart 1

Going Forward With the Index

I always anticipate investors asking this question: “What happens next?” The best I can do is show what has tended to happen in the past. The tables below show how the SPX performed after various readings of the percentage of stocks above their 200-day moving average. Currently, over 95% of stocks are above that moving average, so the current reading is in that last row which I bolded in the table. The next six months tend to be weaker. The average return was 1.9% and the 57% positive rate is the worst of all the brackets. The returns over the next year, however, tend to be much better. The S&P 500 averaged a return of 8.7% over the next 12 months with a remarkable 97% of the returns positive. This suggests some potential short-term weakness, with longer-term strength.

chart 2

Here’s an SPX chart back to 2000 showing times the percentage of stocks above their 200-day moving average reached 90%. Before 2020, there wasn’t a signal since 2013, despite the market's strength. The chart shows a lot of signals before some short-term pullbacks which lines up with the numbers above.

chart 3

This next chart really caught my eye. It is a chart showing where the average stock is in relation to its 200-day moving average. The average stock in the S&P 500 is about 20% above the moving average. That is the highest it has been since late 2009 after stocks rebounded off their financial crisis lows. In this sense, stocks rebounding now after the Covid-19 crash are looking a lot like when they rebounded after the financial crisis. Hopefully, this means we’re in the beginning stages of another decade long bull market.

chart 4

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