The Most Widely Watched Indicator in the Market

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 and a layman-style answer.

I go a bit deeper…

In my effort to judge the market’s underlying strength, I’m most interested in how many stocks are currently trading above their 200-day moving average. If a large portion of stocks are above that average, it proves the market’s underlying strength. When the percentage of stocks over their 200-day moving average falters, I pay closer attention because that is often a warning of underlying weakness.

Yesterday I talked about the stock/bond ratio indicator, which is currently signaling potential weakness ahead. With this in mind, I’m looking for confirmation in other market indicators.

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.

See larger image

As you can see, 85.6% of the stocks in the S&P 500 are now trading over this line in the sand. This is a bullish sign, for now.

What’s more, the indicator is trending upward – making higher highs and higher lows – as the stock market itself makes higher highs and higher lows. This is confirmation of the market’s underlying strength.

That said, the 200-day moving average is a slow warning system. Stocks could stumble a meaningful distance before crossing below their averages. Now is the time to be vigilant… we must watch this indicators for signs of weakness.

I’ve drawn a dashed line, through the 200-day moving average indicator, at the 75% level. When fewer than 75% of stocks are above their 200-day moving average, I’ll be concerned about fundamental weakness in the broad market.

As I said yesterday, we’re at an important turning point. We can’t get jumpy and pull the trigger too early, but we certainly can’t be complacent here either. We should have a clearer picture within a week or so.

Why Winners Keep Winning (And Losers Keep Losing)

If “buy-and-hold” and the notion that you can’t beat the market have left you short of your personal and retirement goals, then you’re going to want to hear the truth about passive and active investing.

Chances are, if you’re more than 25 years old, you think it’s impossible to “beat the market!”

But today, there is MORE than ample evidence that proves:

  • The stock market is NOT perfectly efficient
  • Passive investing can be MORE risky than active investing

You CAN beat the market… you just need to use the right strategy!

Get your FREE copy of the latest report from Adam O’Dell, Why Winners Keep Winning (And Losers Keep Losing)

Click to Learn More
Categories: Markets

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.