Do the Largest Moves Happen Beneath the 200-Day Moving Average?

After the S&P 500 gained 1% on three consecutive days for the first time in four-and-a-half years, several questions were raised. How does the S&P 500 tend to do when above or below its 200-day moving average? With the S&P 500 currently beneath this long-term trend line, is the volatility we’ve been seeing normal?

Going back to 1950, it is very clear that the most volatile days do tend to occur when the S&P 500 is beneath its 200-day moving average. Consider this, the average daily return when the S&P 500 is positive and above the 200-day moving average is 0.57%, versus 0.87% when it is below the 200-day moving average. Thus, when the S&P is below the 200-day, there are bigger gains, but as you might expect, also much bigger losses. Again, the bottom line is that big moves tend to happen beneath the 200-day moving average.

The Most Volatility Happens Beneath the 200-Day Moving Average

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Source: LPL Research, FactSet 02/19/16
Data as of 2/16/16.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

 

Here’s an amazing statistic to show that the days with the biggest gains do tend to take place beneath the 200-day moving average. Incredibly, 16 of the 17 largest one-day gains for the S&P 500 since 1950 have taken place beneath the 200-day moving average. The flip side is where the worst one-day returns have occurred. Once again, the majority took place beneath the 200-day moving average.

The Majority of Both Best and Worst Days Take Place Beneath 200-Day Moving Average

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Source: LPL Research, FactSet 02/19/16
Data as of 2/16/16.

 

In summary, we are seeing some historic levels of volatility in the past few months; however, maybe it should not come as much of a surprise, given it is also taking place beneath the S&P 500’s 200-day moving average.

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

This research material has been prepared by LPL Financial LLC.

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