200 day MA
Renaissance Macro Research, May 14, 2013


Jeff deGraaf, technician extraordinaire (formerly of Lehman now at Renaissance Macro Research) makes an interesting observation about the heavily overbought markets.

Last week, the S&P500 had ~93% of all stocks trading over their 200 day moving average. Normally, this degree of overbought should lead to a correction. As you can see in the inset box, it sometimes does.

However, if you are looking out a year, we see that over the past 3 instances, markets have been higher.

The takeaway is that you should determine if you are a trader or an investor before thinking about whether to lighten up or add on dips.

Different timelines and holding periods should consider different responses to the volatility.

Note you can get see the updated version of this measure at various places online (Index Indicators, StockCharts, Decision Point. You can read more about this measure here.

Category: Markets, Sentiment, Technical Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

17 Responses to “Percentage of SPX Stocks Over 200 Day Moving Average”

  1. [...] How to approach an overbought market.  (Big Picture) [...]

  2. gloeschi says:

    I believe the thinking about this ‘indicator’ is flawed. What does a high ratio mean? Simply means that at lot of stocks are trading above their moving average. They are in an uptrend. You would think ‘the more the merrier’. That’s why a reading above 90% is not negative, but rather positive. Only when the ratio keels over it might give a warning signal. But nothing prevents the indicator from briefly dipping and then recovering.

  3. Pantmaker says:

    This is another good graphic to illustrate how effective QE has been at keeping an overbought market overbought. There is precious little evidence to suggest otherwise. The cracks that are beginning to show in the Japanese markets suggest reason may be struggling back to its feet for a few more rounds.

  4. Hammer of Thor says:

    For a long time many people were beating the “Cyclical Bull in a Secular Bear” Market meme. Is it now clear that we are in the midst of a secular bull market, and have been since March 2009?

    I would argue that’s nearly impossible to time the start of a new secular trend. The timing is only obvious in hindsight.

    • Not sure if I disagree — the caveat is that the Fed has changed the rules.

      • Do you believe the Fed will be quantitatively easing forever? Because if they aren’t, don’t we have to go back to the normal rules? And where will markets be then?

      • constantnormal says:

        Amen. I do not believe there has ever been a time when the Fed — or perhaps any central bank — has pushed money into equities as vigorously as this Fed has. The question I have is when the system gets this bent out of shape, what breaks first, and at what level of stress?

        Yeah, yeah, I know … That’s one of those questions that can only be answered in hindsight …

        Too bad that technical analysis cannot actually predict the future …

  5. [...] about it.  So we have been trading at or near all-time highs (at least nominally) and are heavily overbought, but aren’t [...]

  6. Livermore Shimervore says:

    Does being an investor, and not a trader, necessarily require one to believe in S&P @ 3000+?

    I question the idea that an investor should not take money off the table when S&P stocks that above their 200 ma’s go from 40% to 80-90+% of the S&P, for the third time in barely three years, with a year or less duration for each volatile run up and drop. Are we merely to accept that working class investors supply the booze so that Wall Street can party while these workers pray for S&P 3000 to come out as net winners? Dumb money doesn’t stay dumbe forever.

  7. clocksun says:

    My related question is: How many instances of 90%-of-stocks-above-their-200DMA occur during a typical bull market cycle? Given that the current bull market is approx 5 years old = quite mature, methinks it a prudent time to start harvesting gains on rallies instead of buying dips.

  8. Methinks this indicator needs to be studied over a much longer time period. It’s disingenuous to just show a carefully-chosen 5-year slice. One should not exclude both the prior bull run from 2003ish to 2007 and the 2007 peak. The trend is only your friend until it ends…

    Oddly enough, from 2003-2005 the S&P 500 only managed to have 90%+ of its constituents above the 200-day SMA once, in early 2004. The market spent the rest of that year in the doldrums. It was not a time to buy more. (Source: http://www.decisionpoint.com/tacourse/200ema.html )

    Seems like the current bull rally is therefore in fact “less hated” (or at least more extreme and bubblicious) than the 2003-2005 period…

    • Followup – I took a look at this using the 11-odd years of data available on StockCharts.com.

      The entire preceding bull run (from 2002 to 2007 in the S&P 500) yielded only two periods where over 450 stocks in the S&P500 were above their 200 DMA. The first was at the start of 2004 (as I wrote above), and the S&P went nowhere to down for the next 6-9 months before making new cycle highs again in the fall. Overall it wasn’t a bad time to get into the market for a year or more, but on the other hand 2003 was a much better time, and so was most of the rest of 2004.

      The second instance of the S&P having 450 stocks above the 200 DMA was in early 2007, just a few months before the cycle peak. Although it was possible to buy then and make a profit if one exited in a timely fashion at the peak, it was a particularly poor time to buy with a holding time of 1 year or more.

      Seems to me someone now has a business model that requires asset-gathering, and might be trying to encourage folks to get in, who might prefer to wait…

  9. constantnormal says:

    What’s the 300 dma line look like?

    Just curious. These things should get closer together as the time intervals get larger.

    We might soon be knocking on the door of the 300 dma …

  10. [...] Be aware of your own timeline — are you a trader or an investor? (Then act like [...]

  11. [...] well, Barry Ritholz pointed out this piece of analysis from Jeff deGraaf [emphasis [...]

  12. [...] How to approach an overbought market.  (Big Picture) [...]