Proceed with caution if trading stocks based on this popular market signal

Anxious bulls wait in vain if they wait for the US stock market to break above its 200-day moving average. I say this not because I somehow know that the market will not close above its average level for the past 200 days. My point is that even if it does, it won’t have any particular bullish significance.

The importance of the 200-day moving average is on the minds of stock traders this week, as the market’s powerful rally over the past two months has brought it within crying distance of that average. On Tuesday of this week, the SPX of the S&P 500,
+0.23%
the intraday high was only 0.02% below this threshold. After Thursday’s close, the index was 0.9% below its 200-day moving average, according to FactSet data.

To determine if a close above the 200-day moving average has any significance, I analyzed the S&P 500 (or its predecessor) up to the mid-1920s. I focused in particular on daily where the index closed above its 200-day moving average for the first time. The table below summarizes what I found.

Next month Next quarter next 6 months next 12 months

200-day moving average of buy signals

0.9%

1.2%

2.9%

6.0%

All other days

0.6%

1.8%

3.6%

7.4%

As you can see, over the next month the market improved slightly after the 200-day moving average buy signals. While this is consistent with Wall Street’s bullish interpretation of closing above the 200-day moving average, note the data in the other three columns: over the next quarter, six months, and next 12 months. , the market does slightly less well following such signals. , on average. This is directly contrary to the bullish interpretation.

Before you rush to become a contrarian of the 200-day moving average, you should know that none of the differences reported in this chart are significant at the 95% confidence level that statisticians often use to determine whether a model is genuine. Thus, neither the bullish interpretation nor the bearish interpretation is supported by the data.

The 200-day moving average can still be useful to traders, if used in conjunction with other indicators. It could be, for example, that a 200-day moving average buy signal means one thing when the market is undervalued or interest rates are falling, and another when the market is overvalued or rates go up.

I’m skeptical. Although I cannot analyze all possible combinations of the 200-day moving average with other indicators, the ones I tested showed that the predictive value of the indicator combination was due to those other indicators and not to the 200-day moving average.

The bottom line? The performance of the stock market from here will have nothing to do with its position relative to its 200-day moving average.

Mark Hulbert is a regular MarketWatch contributor. His Hulbert Ratings tracks investment newsletters that pay a fixed fee to be audited. He can be reached at [email protected]

Don’t miss: Hear Carl Icahn at the Best New Ideas in Money Festival on September 21-22 in New York City. The legendary trader will reveal his take on this year’s market madness.

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