Market Commentary: $SPX $SPY

Photographer: Jason DeCrow/AP Photo

Given yesterday's 2 percent down move in the S&P, we've been hearing many different market perspectives on where we are and where we can go (many from people whom I respect and follow). I figured that I might as well offer my perspective as well, if nothing more than a personal entry in the trading journal.

SPX (SPY) broke and closed below its 50-day moving average for the first time since April 10 of this year, or almost 4 months (note that the last time SPX simply closed below its 50ma was April 15, but the last time it crossed below and closed below was April 10). It took 4 trading sessions after closing below the 50ma to then close back above the moving average. The time before that was January 24 of this year, at which point it took 12 trading sessions before we were back above the 50ma. In those cases - 4/10 and 1/24 - the declines after closing below the 50ma were roughly 0.90% and 2.92%, respectively (calculated as the closing price of the first day below the 50ma minus the extreme low of the down move). Remember this is just for 2014, so the sample size is small. 

I then decided to run some tests in excel using the 50-day moving average as the look-back indicator. For disclaimer purposes, I believe theses numbers are correct, but they are not guaranteed to be accurate or complete. So the first test I ran was looking to see what the average number of consecutive days the SPX has spent below its 50-day moving average. I decided to look back 5 years because of the "gen low" of '09. To my surprise, the average number of consecutive days spent below the 50ma was only 4 trading sessions. To be fair, this average can definitely be (and probably is) skewed by large numbers, especially considering the fact that prolonged periods below the 50ma occur in scarce clusters that aren't evenly dispersed throughout the data set. 

I then looked at the percentage of time the SPX spent below its 50ma on an aggregate basis for the entire look-back period, which was 25.66%, meaning of the 1259 trading sessions 25.66% of them were spent below the 50ma. I also looked at how many times the SPX simply crossed below the 50ma (just the 1 day closing below) and found that the SPX has crossed below - on a daily closing basis - its 50ma 37 times since July 31, 2009, that is, of the 1259 trading sessions since July 31,2009, 2.94% of those trading sessions involve the SPX crossing from above to crossing and closing below the 50ma. In other words, it hasn't happened all that often. 

For visual purposes, I've included a chart showing the number of consecutive days the SPX has spent below its 50ma going back 5 years. Notice that the max is 52 consecutive trading days (or about 10.4 weeks), which was back on November 8, 2011.

Ok, now to the technicals. As you can see from the daily chart of the SPX below, yesterday the SPX broke its upward channel, closed below the 50ma, and closed dead on lows with a 2 percentage point drop. 

SPX, daily chart

Looking at the weekly chart, this move so far just looks like another pullback. In the chart below, I've plotted both an 8 and 21 weekly ema (these are just what I use. You can easily use a 20sma as well). I don't consider these exact levels, I use them more as a way to give me a quick visual idea of the trend of the market. Notice that we have seen SPX close below the the weekly 21ema before, 3 times in fact going back to late 2012. However, we haven't seen any type of distribution once below. Rather, these past instances have been met with buying pressure, and the market simply resumes its uptrend. 

SPX, weekly chart

While I recognize the current "pullback-ish" period we're seeing right now, for me to become more cautious on the longer-term picture of the market (SPX), I'd have to see a multi-week period below the 21ema, as this would signal to me a change in character, i.e., a longer-term distribution pattern. 

The funny thing is how people say they want a pullback in the market as its rising and then become overly bearish as it actually pulls in with a "this time is different" mentality. I mean look, yes this persistent bid in the market will come to an end eventually. Is this time different? I haven't a clue! The pullbacks have become shallower and shallower over the course of this bull run. I don't think that means we have to see a 20-30% correction as Marc Faber decisively predicts though. 

We shall see. I will let price do the talking. 

Thanks for reading. Please let me know if you have any questions or comments below. Also, if you feel my numbers are off or would simply like to see my calculations, just contact me for the excel file. 

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