Here’s an interesting analysis of the S&P by Rob Hanna, focusing on the 50-day moving average.
Is The Break Above The 50-day MA Likely To Ignite A Strong Rally?
Courtesy of Rob Hanna, at Quantifiable Edges
The big Fed rally on Tuesday pushed the S&P 500 above its 50-day moving average for the 1st time since September. Bespoke put together some stats on how long other downtrends have remained below their 50-day moving average. I was curious to see how the S&P has performed in the past when it’s risen through its 50-day moving average after spending a lengthy period of time below it. Is it likely to spark a buying spree?
After other similar circumstances the positive edge only lasted about 6 weeks. (Note the Average Trade column peaks at 6 weeks.) Over the 6-week period the average gain is only 2%. Winners gained 5% on average, which isn’t terrible. I also found it notable that the maximum gain was 13.75% for the subsequent 6 weeks. For some perspective, since the November bottom 4 weeks ago the S&P is up about 22%. For the market to match the performance of the last 4 weeks over the next 6 it will need to do about 160% better than it has ever done under similar circumstances. Looking out 15 weeks (75 days), the market still has never rallied 22% after spending 50 or more days below the 50-day moving average.
Also interesting is that the worst 6 weeks was down less than 11%. This suggests a trading range may be more likely than a runaway move up or down.
To baseline the results a little bit I also looked at 50ma crosses when the S&P hadn’t spent at least 50 days below the average:
Nothing Earth-shattering but it outperforms the 1st scenario over most time periods and the gains are certainly much steadier.
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I wonder if the magnitude of the previous decline, prior to the break above the 50-day, has a significant effect on the results? When Rob didn’t require the S&P to spend 50 days below the average, the trading results of going long were stronger. So what if the data is divided into groups according to the severity of the previous decline? – Ilene
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