The stock market has rallied an impressive 36% in the past two months, as measured from the intraday low of 666 on the S&P 500 on March 6 through yesterday’s (5/7) closing price of 907. The index is now just 5% below its 200-day moving average of 956. The 200-day moving average, as its name implies, is simply the rolling average of the past 200 days of closing market prices. It’s widely used in the investment community as an indication of the market’s intermediate term trend. Due to the severity of the current bear market, the S&P 500 has been below its moving average for an entire year now, having last reached it in May 2008. Even then it only briefly touched the average rolling over into a steep leg down. The market hasn’t traded consistently above its 200-day moving average since before the market top on 10/9/07.
We believe that it will be a positive development if the market is able to rally, and stay, above its 200-day moving average. It would be a fairly strong signal that investors really are beginning to anticipate an economic recovery later this year. On the other hand, if the market cannot breach and hold its 200-day moving average, it would serve as a warning sign that investors remain leery of a recovery and thus are reluctant to remain in the market after the recent gains. Either way, we’ll be watching the behavior of the market as its approaches this important threshold for possible clues as to what may lie ahead.
