Thursday, December 18, 2008

Is The Break Above The 50-day MA Likely To Ignite A Strong Rally?

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 ahas 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.

1 comment:

Jeff said...

Rob, I've got to be faster with my publishing. I've spent the last two evening working essentially on the same study you just published.

One note, the last sheet of your post shows at the top that the calc was for the index to have been below the fitty day for at least 50 days, but in the paragraph above I think you wrote that you had removed that condition.