The stock market is falling again. Bad things happen under the 200-day moving average.
Michael Nagle/Bloomberg
The stock market looks set to open mixed Monday morning, and that might be tempting investors conditioned to buy the dips to tiptoe back into stocks. A word of advice: Caution is warranted.
It’s not just because the market is following up last week’s weakness with, well, not much of anything. S&P 500 futures have ticked up 0.1%, while Dow Jones Industrial Average futures have edged up 0.1%, and Nasdaq Composite futures have advanced 0.1%. But without a big rally, the market will remain beneath the 200-day moving average, and that could be a problem.
Market technicians use a variety of moving averages—simply the average price of a stock over a certain time period—to determine where support and resistance might be, and to determine the trend of a stock. A 50-day moving average is a good measure of an intermediate-term trend, while the 200-day is a good indicator of the long-term trend. While they won’t determine whether a stock will ultimately go up or down—fundamentals ultimately win out—they can be helpful in determining when to buy or sell.
Unfortunately, too many stocks and indexes are trading below their 200-day moving average. The S&P 500, which has fallen 7.3% in 2022, is below that level, as is the Dow Jones Industrial Average, which has fallen 4.4% this year. So are the Nasdaq Composite, and the small-cap Russell 2000. The S&P 1500 Amazon.com (AMZN) and Meta Platforms (FB) are below theirs, while Microsoft (MSFT) is trying to hold on to its own.
That the S&P 500 is back under its 200-day moving average is particularly concerning, notes JC O’Hara, chief market technician at MKM. “The blue-chip index stalled at the 50-day moving average and undercut the 200 DMA in late Friday trading,” he writes. “We are seeing more and more topping patterns develop within Sectors and Indexes which gives us cause for technical concern. Bad things happen to charts under their 200 DMA.”
While this discussion of technicals can seem, well, technical, and more like Hocus Pocus than actual investing, there is a certain logic behind the focus on moving averages. Theoretically, when the stock is above the moving average, buyers are still in the money, and willing to add to positions; when below, they’re more inclined to cut their losses by selling. And that can mean the difference between a market that is resilient to bad news, like the possibility that Russia might invade Ukraine, and one that uses it as just another excuse to sell.
And right now there are plenty of those, including the possibility of aggressive Fed action to combat inflation and concerns about margin deterioration among companies.
O’Hara is right. Bad things do happen under the 200-day moving average.
Write to Ben Levisohn at [email protected]
