The 200-day moving average of prices is probably the most widely-watched indicator in the market.
Like many popular indicators, there’s nothing special about it other than the fact that it’s so widely-watched. Its popularity gives it something of a self-fulfilling prophecy effect.
Still, the beauty of the indicator is its simplicity. It creates an agreed upon line in the sand. If a stock’s price is above the average, most investors get bullish. If it’s below, the market gets bearish.
It’s a layman investor’s question — are stocks trading bullish or bearish? And a layman-style answer — yes or no.
It’s a “quick ‘n dirty” measure of the market.
And it’s also suggestive of how stable an index — like the S&P 500 — is while making gains. That’s because, if a large portion of stocks are above that average, it demonstrates the market’s underlying strength… investors are motivated to buy a wide swath of individual stocks.
But when fewer than 50% of the stocks in an index are above the 200-day moving average, it can be a signal that investors are cherry-picking just a small handful of individual stocks. And that can indicate underlying weakness, making it a challenge for the broad index to carry on higher.
So when the percentage of stocks over their 200-day moving average falters, I pay closer attention because that is often an early warning sign.
The 50-day moving average works the same way, only it’s an indicator geared toward a shorter timeframe.
With that in mind, here’s a weekly chart of the S&P 500, along with an indicator showing the percentage of stocks currently trading above their 200-day moving averages (white) and the percentage of stocks currently trading above their 50-day moving averages (blue).
As you can see, 82.5% of the stocks in the S&P 500 are now trading over the 200-day line in the sand. An equally strong 81.4% are also trading above their 50-day moving average. This is a bullish sign.
What’s more, the indicator is trending upward, now reaching its highest level in 2014. This is happening alongside a new all-time high in the S&P 500 itself, so it provides confirmation of the market’s underlying strength.
Watching these indicators closely, which I will, should provide early warning signs of underlying weakness… whenever that develops. But for now, these indicators are about as bullish as they get and we should maintain a bullish bias in the near term.
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