about 1 year ago • 2 mins
The 200-day simple moving average (SMA), which tracks the average closing price of an asset over the past 200 days, is a useful indicator to keep in your toolbox. Major investment houses use it to get a read on the longer-term trend. In fact, trading legend Paul Tudor Jones has said he’d close his investments if they fell below the 200-day SMA. There’s a reason why it’s a go-to: with its longer data period (200 days), it smoothes out the noisy, volatile, day-to-day price moves and provides a more efficient way to analyze the trend.
Here’s why I’m telling you about this now: the S&P 500 closed above its 200-day SMA on November 30th, for the first time in more than seven months. And that suggests better stock returns ahead. This chart shows the S&P 500’s performance after a close above the 200-day SMA, dating back to 1990. As you can see, returns over the medium and longer term are solid. At the 3-month mark, average returns were at 3.18% with a near 75% rate of positive returns. Push the time window out even further to one year and that gain increases to 9.01% with a positive rate of return at 83%.
And it’s a similar story if you look back beyond the ’90s too: in the 13 times since 1950 when the S&P 500’s price was below the 200-day SMA for six months or more and then closed above that mark, the index yielded an average gain of 18.8% a year later, with a positive return in 12 out of the 13 times it occurred. Only once did it go on to make new lows. Now, I’m not saying you should rely solely on this indicator for your investment decisions, but it’s one piece of the puzzle to consider.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.