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Perhaps I am too cautious or too willing to play both sides of the market, but I don’t like the development I am seeing on the weekly chart for the SPDR S&P 500 ETF (NYSEArca: SPY).
The problem I have with the present chart are the similarities between now and what happened back in early 2008.
After a good bullish run from the end of 2002 through October 2007, the SPY gained just over 120%. During that stretch, the 13-week moving average never crossed below the 52-week moving average.
In the final week of 2007, the 13-week made a bearish crossover of the 52-week. The SPY found some footing in the $107 range in January and again in March and then it bounced back from March to May. That bounce took the ETF back up into its 52-week moving average and many were saying that the correction was over.
As we know now, the correction was far from over. In fact, the correction was getting ready to turn into a roaring bear market that would see the SPY drop another 50% from that May 2008 high through the low the following March.
Flash forward to today and we are seeing a very similar pattern develop. The SPY has rallied sharply from the March 2009 low to the high in July. The fund gained right at 260% from the low to the high. During this bullish phase, we did see the 13-week moving average drop below the 52-week moving average briefly in late 2011 which is different from the 2002-2007 rally.
But now the 13-week crossed bearishly below the 52-week last month and the SPY found footing in the $186 to $187 range. The dip down below $182 occurred on Aug. 24, which was the morning a number of ETFs were mispriced – which makes the chart look less clean than the one in 2008. However, we can see in the SPY chart below that the fund has now rallied back in to its 52-week moving average, just as it did back in 2008.
There are a couple of differences in the patterns that could work in favor of the bulls. First, the SPY was in overbought territory when it hit its 52-week moving average in May 2008 whereas it isn’t right now, at least based on the slow stochastic readings from the two periods.
The second difference is the amount of time that elapsed during the two periods. In 2008, the 13-week moving average had been below the 52-week for approximately four months and at this time, the 13-week has only been below the 52-week for about five weeks. These two factors could help the SPY to move back above its 52-week moving average.
While I don’t think there is a certain trade here at this time, this is certainly worth keeping an eye on. I wouldn’t run out and sell all of my stock holdings right now, but I also wouldn’t want to be fully allocated to stocks right now either. I would take these developments as a sign to pay close attention and be prepared to take action that will protect your portfolio.
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