Stocks (S&P 500) Still Show Technical Weakness
The market’s sharp rebound and recovery since late December has truly been impressive. But some analysts are warning that it may be a bit too early to jump back into the fray. What’s behind these concerns amid strongly rallying markets? Stocks – particularly in the S&P 500 – are still showing technical weakness. And it’s all in the moving averages.
What are Moving Averages?
Many technical analysts have a special affinity for moving averages. Those are the squiggly lines on a price chart that provide a running tally of average closing prices over the past x number of periods. The most commonly watched moving averages include the 200-day and 50-day. These, of course, are both plotted on a daily chart.
For longer-term chartists, the 10-month is probably the most commonly plotted moving average. As the name suggests, it’s plotted on the monthly chart. But when you do the math, the 10-month is essentially around a 210-day moving average, which is very similar to the ubiquitous 200-day.
So why use the 10-month moving average at all? Well, some see the daily chart as too fast, as it has a new market close every day. This can often result in whipsaws above and below a moving average, thereby providing frequent false signals. The monthly chart obviously has only one close per month. This means that its signals are much slower and more stable than the daily, or even weekly, chart.
What is the 10-Month Moving Average Telling Us Now?
According to some market-watchers, a monthly close below the 10-month moving average is a sign that investors should be in cash, and not invested in the stock market. A close above the moving average, in contrast, is seen as a signal to invest in the market.
Last month – December – saw the S&P 500 close far below the 10-month moving average. This suggests that investors should now be holding primarily cash instead of stocks. In fact, the daily chart is saying pretty much the same thing, as price is also currently trading under both the 200-day and 50-day moving averages.
While moving averages alone should never be the sole basis for investing or not investing in the markets, it’s almost always a good idea to exercise increased caution during potentially volatile market environments like what we’re currently still seeing.
IMPORTANT: The information above should not be construed as investment advice and should not be considered as a solicitation to buy or sell securities. Past performance is not indicative of future results. Trading and investing in the financial markets involves substantial risk of loss, and may not be suitable for all investors.
Disclosure: At the time of this article’s publication, we have no position in any security or trade/investment mentioned, nor do we have any business relationship with any company whose stock may be mentioned.
Chief Market Strategist at The Technicals
With more than two decades of experience as an equity analyst for several major research firms, Don has covered individual stocks (both technically and fundamentally) across a wide variety of sectors and industries, including tech, financial, and retail. He has been quoted regularly in key financial media like Bloomberg and Reuters. Contact Don