The S&P 500 Is Trying to Hold Its 200-Day Moving Average. What Happens If It Breaks.

What’s driving the decline? We’d point to the Federal Reserve, which says that it intends to keep short-term interest rates high to ensure inflation gets tamed. That’s also pushed long-dated bond yields higher, making stocks less attractive simply based on yield differentials. The conflict in Israel and Gaza certainly isn’t helping investor sentiment.

With the S&P 500 sitting at its 200-day moving average, it now looks vulnerable to more declines. A drop below the 200-day moving average typically signals that longer term investors are starting to lose money and might be primed to sell if declines continue. This one might be particularly important because the S&P 500 had spent 25 days trading between the 200-day and 50-day move averages, the second longest streak in the past 30 years, according to SentimenTrader. While that could indicate some short-term pain, it could also lead to longer term gains: The S&P 500 was higher three months later 78% of the time for a median gain of 3% since 1936 after trading between the two moving averages for at least 25 days.

Still, breaking the 200-day moving average after spending a long period above it could mean trouble, according to SentimenTrader. Since 2010, such a break has resulted in four losses over the next three months and four gains, with an average return of just 0.5%. The worst-case scenario was in 2020, when the pandemic caused the S&P 500 to drop 17% in just two weeks. An early break in 2022 saw the S&P 500 drop 9.8% over the following six months.

If the break is real, investors should keep a close eye on 4100, down 3.3% from a recent 4242, and then 3900, which would be an 8% decline. For those looking for a buying opportunity, ensure the index holds that 200-day moving average first. If it doesn’t, another meaningful drop—and a better buying opportunity—could be in store.

Write to Jacob Sonenshine at [email protected]