Study: Dow broke below its 200 dma. A potentially bearish sign for stocks


Most of our recent medium-long term stock market studies have been bullish. Here’s a bearish study, and why I don’t think it’s as bearish as the results suggest.
The Dow Jones Industrial Average has closed below its 200 daily moving average for the first time in 501 days. This is a pretty long streak.

There have only been 8 historical cases in which the Dow rallied at least 400 days before falling below its 200 dma.

  1. July 23, 1996
  2. October 15, 1987
  3. May 23, 1956
  4. July 23, 1946
  5. April 26, 1937
  6. October 21, 1929
  7. March 3, 1926
  8. May 1, 1906

Here’s what happens next to the Dow when it closes below its 200 dma for the first time in at least 400 days.

Click here to download the data.

Conclusion

As you can see, the stock market’s 6 month – 2 year forward returns are pretty bearish. Several large crashes happened after the Dow closed below its 200 dma for the first time in at least 400 days.

  1. 1987 crash (“significant correction)
  2. 1937 crash (bear market)
  3. 1929 crash (bear market)

However, 2 massive rallies also occurred after the Dow closed below its 200 dma for the first time in 400 days:

  1. 1996 (up 70% 2 years later).
  2. 1926 (up 38% 2 years later).

I don’t think the bearish cases are going to play out right now.

  1. Before yesterday, the Dow had spent 501 days above its 200 daily moving average.
  2. The 1929 bearish case saw the Dow rally much more: it spent 787 days above its 200 daily moving average (a year more than the current case).
  3. The 1987 bearish case saw the Dow rally much more: it spent 715 days above its 200 daily moving average (a year more than the current case).

In conclusion, this is a potential medium-long term bearish sign for the stock market. But never will there be a time in which all the studies are bullish or all the studies are bearish.
The majority of medium-long term studies are bullish for the stock market right now. Hence I remain bullish.

2 comments add yours

  1. Goes with my scenario, A summer rally to 3000 area SPX & a very bad fall 2018 & then a lot of chop or very little direction to the SPX going into 2019

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