The S&P 500 Index officially closed beneath the low close from December 2017 earlier this month. Why does that matter? Historically, this has been a warning sign of potential equity weakness so it may be worth considering more. Developed by Lucien Hooper, a Forbes columnist and analyst in the 1970s, the December Low Indicator suggests that if the S&P 500 closes beneath the previous December’s low close during the subsequent first quarter, trouble could be brewing.
“There is definitely something to the December Low Indicator. When the lows are violated, like they were this year, the S&P 500 has gained just 3.3% on average, versus a 22.1% average return when the lows aren’t violated,” said Ryan Detrick, Senior Market Strategist.
Don’t start panicking though. History suggests stocks may still end the year in positive territory, and the indicator hasn’t been nearly the warning sign as it once was. In fact, the previous eight times the lows were violated, the full year was higher seven of those times with some solid gains.
“This concerns us, but in the end, over the past 15 years these warnings haven’t panned out. We instead advise investors to take note of this warning, but don’t forget that global economic growth is accelerating, as are corporate earnings; and the benefits from tax reform and fiscal policy may continue to improve the U.S. economic backdrop as well,” said Detrick.
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