A couple of weeks ago, extreme extensions of the S&P to its 200-day MA were examined dating back to 1950. The simple conclusion was such extremes were rare, even for a relatively modest 15% move away from the 200-day MA.
In this article, the 10-15% range from the 200-day MA was examined for the S&P. This period included the August 2011 swing low. The year and month when this event occurred was recorded in the table below.
The first point to make is the clustering of this condition by year. None of this is a surprise since it reflects bearish market conditions, primarily cyclical bearish market events. The current sequence is unusual given its protracted duration from 2007 to today (and maybe into 2012?). Ultimately, this may help the S&P build the next rally and offer a protracted bull market, much like the nineties offered (but probably not as good!).
The second point is the clustering across months. 1974 was a particularly bad year, for 9 of the 12 months the S&P traded 10-15% below its 200-day MA. Ultimately, it maxed out at 28.7% from its 200-day MA in October of that year.
This second point will likely have bulls scared for the rest of the year and into next. In 63% of cases, the S&P has two or more months within the year when the S&P was 10% or more away from its 200-day MA. Luckily, of those cases, 58% were for two or three months in the year. So while we may see another 10% break in September and October, it likely won't be enough to prevent a Santa rally.
In August, the S&P was trading in a pattern similar to December 1973. This is perhaps the most bearish outlook of the current scenarios on offer. Should this hold true, then the next 12 months are unlikely to deliver much joy. Although the October 1974 low ultimately marked the starting point for the next secular bull market up until 2000.
Again, a Zignals Stock Alert set to mark an SPY cross above its 200-day MA will protect against downside risk and let you know of a good time to start buying stocks.
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Dr. Declan Fallon, Senior Market Technician for Zignals.com, offers a range of stock trading strategies via his Zignals home page. Each Zignals member has an unique home page which they can share with friends and clients to sell their strategies.
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