OPINION: If the stock market does decline, don’t blame it on the S&P 500 breaking below its 50-day moving average.
The S&P 500’s breaking below its 50-day moving average last Friday is not a good reason to sell. In fact, the S&P 500 SPX, +0.15% over the past four decades has performed better than average when the market was below its trailing-50-day average.
My review of U.S. stock market history fails to find statistical support for this doomsday scenario, as you can see from the summary data in the accompanying chart. It shows the stock market’s average performance over the subsequent month-, quarter-, six months-, and year depending on whether the S&P 500 was trading above or below its 50-day moving average. Notice that the returns were slightly better following days when the S&P 500 was below its moving average — not above.
I hasten to add that you should not conclude that, because the S&P 500 is now below its 50-day moving average, you should become more bullish. The differences plotted in the chart are not significant at the 95% confidence level that statisticians often use when determining if a pattern is genuine. It should be obvious, but I’ll remind you of it anyway: The stock market may still decline in coming weeks. MarketWatch outlined seven other possible causes of such a decline, and I can add one more: unfavorable sentiment. The broader point of this analysis is that, if the stock market does decline, don’t blame it on the S&P 500 breaking below its 50-day moving average.
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