The 200 day moving average(MA) is often used as a bench mark to assess a stock for whether it is bullish or bearish. The number of US stocks above their 200 day MA has been on the increase all of this year and the current value is around 73%. I thought I’d try and track this information against the S&P500 to see if the correlation, or lack thereof, might tell me anything.
S&P500 and the Number of stocks above the 200 day moving average:
The chart below shows how the S&P500 has moved with respect to the number of US stocks above their 200 day MA, the $MMTH chart index, over the last 15 years. I’ve noticed a few things:
- when the $MMTH value gets to near 90% this generally marks a peak and the index then dips.
- mean reversion, or reversal, reaction on the $MMTH index tends to evolve in the 70-90% range for peaks and the 10-30% range for lows.
- we are currently in the range of 70-90% where the $MMTH index may reverse.
- dips in the $MMTH index generally result in a dip in price of the S&P500 BUT the size of the move on one seems to bear little in relation to the size of the move on the other.
- strong corrections away from the 70- 90% level on the $MMTH index don’t always parallel sharp moves in S&P500 price: Note how in 2004, 2005, 2006 and 2007 there were sharp moves lower for the $MMTH index but only modest dips on the S&P500 index.
- the percentage $MMTH index has generally moved in tandem with the S&P500 for the last 15 years EXCEPT for the period of 2014 and this is highlighted on the chart below. I can’t think of a decent reason for this divergence but, if you can, then please let me know.
- In the last 15 years the $MMTH index has peaked at the extreme level of 90% only two times: in 2004 and in mid 2009 and for both of those times the corresponding correction in price action on the S&P500 was fairly modest. These two periods are shown below:
The S&P500 index is trading above its own daily 200 MA as the following chart shows. The fact that many stocks are also above their 200 MA is often regarded as a positive breadth factor:
Conclusions?
Thus, what can one conclude from observing the percentage chart showing the number of US stocks above their 200 day MA?
- The main conclusion I can draw from this mere 15 years of chart evidence is that when the percentage of stocks over their 200 day MA reaches a peak in the 70% to 90% bracket there is usually some mean reversion on the $MMTH index and a corresponding dip on the S&P500. We are in that range at the moment.
- The size of the dip on the $MMTH chart bears no clear correlation with the size of the correction on the S&P500 index.
- Does a high percentage on the $MMTH chart suggest an imminent crash in price for the S&P500? Based on this chart evidence the answer would have to be ‘No’. However, one should expect a move lower on the S&P500 but the size of this move bears no relation to the size of the move on the percentage $MMTH chart.
I have copied the longer-term chart of the S&P500 below and this shows the recent breakout from a 15-year trading range. The breakout level was 1,600 and I keep wondering if this level might be tested again before any possible bullish continuation; in the same way that the previous breakout level was tested. I’ll just keep wondering:
NB: please let me know if you observe any other pattern or feature that I may have missed.
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