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I am a big believer in using moving averages and crossovers between different length moving averages to determine trends in the market or in an individual stock.
Because of the massive selling in the market last week, the Dow Jones Industrial Average saw its 13-week moving average (one quarter’s worth of data) cross bearishly below its 52-week moving average, and it looks as though the S&P 500 will follow suit with a moving average crossover either this week or next week.
The 10-week moving average on the S&P hit oversold territory thanks to the massive selling last week. It’s the first time the oscillator has hit oversold territory since August 2011. Interestingly, last week’s loss of 5.77% was the worst weekly loss for the index since September 2011. The loss also allowed the S&P to close below the 52-week moving average, and Monday’s action took it below the 104-week moving average (two years of data), which it hadn’t done since 2011.
I view the 13-week moving average crossing below the 52-week as a sign to become more cautious and lower overall equity allocations. If the 13-week moving average crosses below the 104-week, move out of equities almost completely.
Looking at the last bear market from 2007 through 2009, we see that the market topped in October 2007, and by February 2008 the 13-week crossed below the 104-week. When the index attempted a rally, it was halted at the 52-week moving average.
Going back further and looking at the index back in the 2000-2002 bear market, we see that the market peaked in March 2000, moved sideways until August and then started rolling lower. By December, the 13-week moving average had crossed bearishly below the 104-week moving average.
If we look at a weekly chart for the last 16 years, investors could have saved themselves from a lot of pain if they had moved out of stocks and into cash or treasuries in late 2000 and again in early 2008.
The 13-week moving average is still 117 points above the 104-week moving average, so there would have to be a continued slide in the market for the bearish crossover to occur. But when the 13-week crosses bearishly below the 52-week, it tends to be a sign to proceed more cautiously. If the market fails to rally in the coming weeks and the S&P doesn’t move back above the 104-week, it won’t take long for the 13-week to cross below the 104-week.
The range-bound market we were in from February until last week allowed the 13-week moving average to flatten out, and now with the last two weeks being sharp down moves the trend line has already started moving lower.
My advice is to keep an eye on these three moving averages and make adjustments to your portfolio accordingly. I will continue to monitor them, of course, and will likely write about them again if the 13-week gets closer to the 104-week.
For now, I would say proceed with caution. Over the last six years, investors have gotten used to buying the dips, and that has worked up until now. But what happens when it is the next bearish phase and the market doesn’t just bounce right back?
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