On Friday, SPY had traded for 38 days beneath its 200 day moving average. Is this bullish or bearish for the future?
Trading beneath the 200 day moving average (MA200) is considered by some traders to be a reliable indicator of a bear market. The research below confirms that a binary approach to using the MA200 is too simple. Over the past 16 years, the longer SPY trades beneath the MA200, the more likely it is that it is in a bear market. However, long-term mean reversion eventually takes over and the longer it trades beneath the MA200, the more likely it is that the bear market is nearing its end.
I included $SPX in the tests because I have data for it going back 60+ years. As has been a recent theme on this blog, note that the bear markets included in the SPY data (16+ years) have been considerably longer and more volatile than the bear markets over the past 60 years.
Buy SPY or $SPX at the Close If:
- It has traded for X days beneath the 200 day moving average
- Sell at the close X days later
No commissions or slippage included. All SPY history used. $SPX data starts in 1960.
We want to focus on the dark blue line, which just happens to be the lowest on the graph. That line represents what would have happened historically if Friday’s close was bought (buying after SPY traded for 38 days beneath the MA200). Unfortunately, it seems that SPY is currently in a very bad spot, in terms of how long it has traded beneath the MA200.
Note the green and red lines. They show that if SPY has traded for a short time (10 days) or for a very long time (100 days) beneath the average, results improve. Note how volatile the red line is.
The $SPX data is represented by the light blue and purple lines. The purple line is moderately bullish while the light blue line is bearish to neutral. Over the last 60 years, we see that there have been mild bear markets which have smoothed the averages.
The bottom line is that SPY is currently in a bad spot. It has traded long enough beneath the MA200 to do serious damage but needs to trade longer beneath the average before we start to look for long-term mean reversion to take over.
I’m inclined to believe that the current bear market will look much like the last bear markets of the past 16 years, although it is important to consider that it may turn out to be more mild, and thus we might expect future performance to look more similar to what is suggested by the $SPX data.