Hennion & Walsh Trending

Many technical analysts are dancing in the streets these days – using their historical trading charts as their dancing partners of course.  For the first time since December 2007, the S&P 500 Index, widely considered as the barometer for the U.S. stock market, has now broken through its 200-day moving average.  This event has suggested to many that perhaps the markets are now beginning to stage a meaningful and sustainable market recovery.  If true, this may signal a buying opportunity to institutional and retail investors alike.

While I generally do not put too much weight in technical chart analysis and believe that robust asset allocation strategies have a more profound impact on portfolio performance when compared to market timing, or even security selection for that matter, it is hard to dismiss a consistent long-term trend associated with any relevant market statistic.   Hence, our Research team at Hennion & Walsh dug deep into the historical data to help determine if, in fact, the S&P 500 200 Day Moving Average could be viewed as a reliable investment timing statistic.

To start, it is our opinion to start that merely crossing through the average is not a sufficient signal in and of itself.  When markets are moving quickly in the midst of seemingly trendless volatility, the average could be crossed in both directions on multiple occasions without presenting any clear market signals.  As a result, we used a 5% margin of safety in our study.  Our research study utilized historical dating back to 1950 from Yahoo Finance and yielded the following results:

• There have been 39 potential buy or sell signals based upon our self-imposed S&P 500 200-Day Moving Average 5% margin of safety criteria over this time period.   This works out to a potential buy or sell signal roughly once every 1.5 years over this time period.

• Every buy signal suggested by our self-imposed S&P 500 200-Day Moving Average 5% margin of safety criteria was followed by increases in the S&P 500 afterwards.

• Measuring the cycle beginning with each buy signal and ending with each subsequent sell signal, using our self-imposed S&P 500 200-Day Moving Average 5% margin of safety criteria over this time period, the average increase in the S&P 500 over each cycle was approximately 42.7%.

This particular market recovery may very well be different from historical market recoveries but, as I stated earlier in this post, market statistics that possess this consistent of a long-term trend should not be entirely ignored.  Further, these results, and the recent behavior of the underlying average itself, may provide another missing piece to the investor confidence puzzle and present yet more evidence towards the case for staying (or becoming) invested, in a diversified and strategic manner, in the equity markets to take part in the next bull market.  However, it is important to recognize that the S&P 500 still has not crossed our 5% margin of safety threshold and I personally still believe that there is still a potential pullback ahead of us before the market lays the ultimate foundation for a sustained recovery.

Please note:  Past performance is not an indication of future results.  The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. You cannot invest directly in an index.