The following is a reprint of the market commentary from the October 2019 edition of The Option Advisor, published on September 27. For more information, or to subscribe to The Option Advisor -- featuring 10 new option trades each month -- visit our online store.
Regular followers of our analysis will be aware of our fondness for the 160-day moving average as an "off the radar," yet often deeply significant, technical indicator. While conventional wisdom dictates that chart-watchers should use a 200-day moving average as their long-term daily trendline of choice, we've often found that stocks and indexes in strong uptrends will tend to find support for pullbacks at the slightly "faster" 160-day counterpart. And since this alternative trendline is relatively little-followed, traders who keep it high on their radar can often find an edge over more traditionally minded technicians.
All of which is to explain why we're so interested in the streak currently taking shape atop the 160-day moving average of the broad-based SPDR S&P 500 ETF Trust (NYSEARCA:SPY). This past Tuesday, Sept. 24, marked the 138th consecutive close by SPY above its 160-day trendline, extending a run that began with a bull gap by the exchange-traded fund (ETF) on Monday, March 11 (and one that remains ongoing, as of publication time).
In recent weeks, we've noted the significance of that SPY 160-day support, as this technical floor has been increasingly crucial at containing lows over the past six months. In particular, SPY settled nearly flat with its 160-day moving average on Monday, June 3-- the low close of its current 160-day outing, at which point its return for the streak had nearly evaporated, at just 0.04%.
A little less than two months later -- on Friday, July 26 -- SPY tagged its high close of the current streak, at $302.01. That brought the ETF's return for the streak to an even 10%... as well as pushing its year-to-date gain to 20%, and coinciding with a first-ever test of 3,000 on the S&P 500 Index (SPX). Faced with all of these psychologically significant round numbers, and with room to fall about 7.5% before meeting back up with its 160-day moving average, the SPY embarked on a sharp sell-off over the next six sessions that shaved just over 6% from its value.
By mid-August, though, SPY had met back up with its 160-day moving average -- and now this trendline was angled higher, rather than meandering sideways, as when it had caught the early June low. The latest tests of this trendline directly preceded the rally in stocks during the first half of September, which resulted in SPY crossing above the $302 level again on several occasions intraday, though not yet on a closing basis, as of this writing.
Taken in historical context, the current SPY trip above its 160-day moving average may yet be in the early innings. We have returns on the ETF going back to 1993, and there have been just 10 previous times the shares have managed a streak this long above their 160-day. Looking at all 10 prior instances, the average length is 263 trading days before a close below this trendline, which would mean we're only about halfway into the streak. And zeroing in on the four comparable occurrences since the March 2009 market bottom, the average length of these win streaks has extended to 315 sessions -- more than twice as long as the current run.
And, judging by returns at the 138-day mark -- a benchmark notable primarily, we'll admit, for coinciding with our publication date -- this current streak could use some extra time to make up ground. As of Tuesday's close, SPY was up only 7.8% since the start of its 160-day moving average breakout, representing the smallest 138-day return among all previous streaks.
The table below displays returns for each streak after 138 consecutive days above the 160-day moving average, as well as the returns one month, three months, six months, and one year later. The only other time SPY has been sitting on a return this modest at this point in the streak was in March 2007. As you can see, the one-month through six-month returns were all fairly bullish following that March 2007 check-in date, though the wheels had fallen off by March 2008.
Note, also, that following the two most recent signals -- in May 2017 and June 2013 -- SPY was flat to slightly higher over the next few months. In fact, per the table below, SPY's average one-month return after this point in a consecutive win streak above its 160-day moving average is just 0.02%. That's well short of its average anytime one-month return of 0.73% since 1995, even though the percentage of positive returns is somewhat higher.
However, aside from that short-term choppiness, the longer-term SPY performance from here could be a notch more bullish than usual, based on the average returns and percentage of positive returns over the next three, six, and 12 months. Additionally, the standard deviation of returns is lower than usual over all time frames, suggesting tamer broad-market volatility could be a feature of a continued trend higher along the 160-day moving average.
And while, as noted above, the ultimate end date may yet be a while off -- SPY has been testing a foothold at its further-north 80-day moving average this week -- it's also worth looking at what happens after a lengthy 160-day win streak is broken. As it turns out, a close below this trendline tends to yield unequivocally bullish returns, with SPY quadrupling its average anytime one-month return, and more than doubling its usual three-month and six-month returns. Likewise, the average 12-month return after a 160-day streak is broken nearly doubles the typical SPY performance, and the percentage of positive returns is higher than normal over every time frame.
While these returns are based on just one technical indicator, and any bullish implications herein are by no means prescriptive, the results described above certainly serve to highlight the importance of the 160-day moving average for SPY and its broad-market cohorts.
And as a final punctuation mark on the 160-day's significance, consider this: If you were following the 200-day moving average religiously, you might well have panicked out of stocks on May 31, when SPY ended a month-long sell-off by closing below its 200-day moving average for the first time since March 11. Alternately, using the 160-day as a guide, you'd have sat tight in equities for that catch-and-hold at the June 3 closing low -- a welcome sign of technical resilience for SPY, and one that arrived directly ahead of the ensuing 10% rally into the late-July highs.