Concern as S&P 500 shares dip below 200-day moving average for the first time since 2012
The unthinking US bull market is over. The simplest technical indicator there is – whether the market is in an uptrend or not – no longer says buy the S&P 500, after shares dipped below their 200-day moving average for the first time since 2012.
The measure provides a guide to whether shares have upward momentum or not, and for 494 days it said they did – the second-longest uptrend of the past half-century (after 1996-1998, which ended with Russia’s default).
In some ways this is just a way for chartists to state the obvious: shares haven’t done very well recently. At Monday’s low the US market was down 6.4 per cent from last month’s all-time high. European shares are doing far worse; at Monday’s low German shares were down 14 per cent from January’s post-crisis peak, having giving up more than a year of gains.
But in markets momentum matters. As shares go up they become more expensive, meaning lower returns in future. Investors, though, like to buy rising shares, in part because they know that others do too.
There has been plenty of buying on the dips over the past few days as shares have tumbled. But each rally has petered out as traders choose to sell on the rips instead, as fear dominates greed. The loss of long-term momentum takes away another crutch for investors.
There is nothing magical about the trend line, though. As the chart shows, shares have often dipped a little below the trend before resuming their rally.
Support has often been provided by the Federal Reserve. The Fed’s doves are cooing, but shareholders seem more focused on the weak economy causing the central bank caution. Futures markets no longer expect a US rate rise next summer, and the odds of rates still at zero by the end of next year have leapt to one in four. The odds of two or more hikes by then have plunged from 50:50 to one in six.
The sheer length of the bull run raises the odds that a drop turns into a rout. The longer shares trend up, the more investors take risks they would be uncomfortable with in normal times. If normality looks like returning – the Fed’s QE is due to end this month, after all – investors may choose to stop taking those risks.