The S&P 500’s Flashing Signals

The S&P 500’s Flashing Signals
Luke Suddards

over 1 year ago2 mins

Mentioned in story

Looks like the S&P 500 indulged in an extra cup of coffee this Monday and Tuesday: the index has now risen more than 5% since the start of the week, completely wiping out last quarter’s 4.9% loss – the third quarterly loss in a row, a feat unseen since the 2008 financial crisis. This week’s rally was sparked by speculation that the Federal Reserve could pivot away from its aggressive rate hikes, perhaps spurred on by weakening US manufacturing data and fresh concerns around Credit Suisse. In fact, markets are now pricing in a small chance of a rate cut in the first quarter of next year, and they’re downgrading their peak interest rate expectations – the highest they predict the US central bank rate will hit – from last week’s high of 4.8% to 4.37% today. But there’s no promise this rally will stick around for long: Friday’s US jobs report could flip those market expectations on their head, especially if there’s a punchy gain in jobs and/or if wage pressures stay high.

There's more to the story, mind you. The S&P 500 flashed a reliable signal last week: its price fell 20% below its 200-day “simple moving average” – put simply, the average price over the last 200 days. That matters: you can see in the chart above that over the last 100 years, that exact marker has led to positive returns soon after – except in 1931, 1937, 1974, and 2008. But even when you include those troublesome years, the median return three months after that signal has sat pretty at 7.6%.

It’s also worth checking out how many S&P 500 stocks are trading above its 200-day simple moving average. That measure clocked in at under 20% last week, which has only happened 15 times since 1998. And when you average out the returns three months after each of those occasions, you get a healthy 4.6%. Combine those two indicators with the S&P 500’s tendency to usually rise from October to December every year, and you could be looking at a better chance to make some returns. So from a timing perspective, it may be a good entry point to dip your toes in.

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