The S&P 500 index (SPX) closed at 1485.01 after a 'big' 'trend day' gain of 1.5% on Wednesday. This lofted the index above its average price looking back over the last 200 trading days. The 200-day average is the king of trend indications and is widely watched. Traditional technical analysis lore says that when a market's value is above the 200-day average, then it is in a bullish trend mode, and that when it is below the average, it is in bearish mode. Now, really all it is saying is that the market 'has been' going up relative to where it has been in the last 200 trading days (most of the year) or down relative to that benchmark. In this case, looking at the chart below, you can see that the index has been swinging back and forth above and below the average (plotted in red) many times this year. But does this indicator give us any predictive value?
Here at MarketHistory we like to know and understand how the traditional lore says an indicator should behave, but, at bottom, we are of an empirical nature and like to let each market tell us how it likes to respond to events like this. Every market has its own crowd of people trading it, following it, nudging it here and there, and so every market has a distinct personality and may react differently to various events and movements and seasons of the year.
That last factor is an important one, because markets have different moods during the year. December is, for those in the Northern Hemisphere, the darkest month of the year, when things are their most bleak - the leaves are off their trees, exercise and outdoor leisure activities are curtailed because of cold weather, and the amount of daylight each day is getting smaller and smaller until late in the month when that solar trend changes. Folks are stressed about the holidays, portfolio managers are stressed about their trading performance and their year-end bonuses. The beginning and the end of stories are often the most important parts, and December marks the end of the story of the stock market for the year 2007.
So, the stage is set. To find out how the SPX has done in the past when it has crossed above the average price over the last 200 days. We asked the Market Information Machine (MIM), which has the historical data for the index back to its inception in 1928:
Q: How has the SPX index performed in the past when it has crossed above its average value over the last 200 trading days in the month of December?
A: According to the 11 previous occurrences of this event, which span as far back as 1932, EventEdge indicates that SPX has shown a strong bullish edge that peaks 20 trading days after the event. Thus, the projected date for the peak of the bullish edge relative to the current event date (Wednesday, Dec. 5, 2007) is Friday, Jan. 4, 2008.
SPX rallies over that period in 91% of the cases (10 of 11) by an average of 4.3% relative to the close on the event date. The average of the one decline is 1.7%. The overall return of the 11 cases is 3.8%, which, based on the close of SPX on the event date (1485.01), provides a target price of 1541.44.
If you'd like to try some different event combinations on the S&P 500 index, click here to see the events of this trading idea in EventEdge®. One suggestion might be to see how the index has performed after all crosses above the 200-day average, or crosses above the 200-day average on a 'big' move higher. There are lots of ways to skin a cat, and EventEdge lets you explore all the recent relevant events in the S&P as well as market and almanac events.
If you would like to see more details of this historical edge, go to www.markethistory.com
Gibbons Burke is editor of MarketHistory.com.
