Battle for 3000: Bulls and Bears Ready for “Dogfight”

After climbing 33% since the late-March lows, the S&P 500 index closed at 2955 on Friday, putting the psychologically important 3000 level within reach.

In addition to the psychological importance of the 3000 level, that also happens to be where a key long-term technical indicator sits that is widely used to determine if we are in a bull or bear market.

The two most commonly used indicators are the 50-day and 200-day moving average. The 50-day is used by investors as a gauge of the short-term market trend, while the 200-day moving average indicates the long-term market trend.

“The fact that the S&P 500 is coming off a 35% rally and that this 200-day moving average lines up with a nice even 3,000 number seemingly makes this area especially important,” said Renaissance Macro Research analyst Kevin Dempter in a note on Friday. “A breakout is not likely to come easily and we expect a dogfight here around the 200-day.”

For 21-straight trading sessions, the S&P 500 index has bounced between the 50-day and 200-day moving averages. Jason Goepfert, head of SentimenTrader and founder of independent investment research firm Sundial Capital Research, stocks are “trapped between time frames.”

While bulls anticipate the S&P breaking above 3000 – and simultaneously the 200-day moving average – will signify a new bull market and push stocks to record highs, history indicates that may not be the case.

Dempter says that since 1928, there have been 29 instances where the market traded between the 50-day and 200-day moving average for at least 20 days. In 21 of those 29 instances, the S&P 500 ended up falling below the 50-day average, while only eight ended with a push above the 200-day, he noted, making for a roughly 72% probability the index will break down.

Mark Arbeter, president of Arbeter Investments, said in a note to clients last week that as we approach the key 200-day indicator, “One would think that after a big correction or bear market, and then a retaking of this key average, the bulls would go wild, the bears would capitulate, and the stock market would go into outer space.”

He points back to previous times the S&P tried to climb above the 200-day, and says it won’t be easy.

“When the S&P first cleared the 200-day in June 2009 as we were coming out of that major bear market and the financial crises, the index stalled and then pulled back about 7%, riding on the top of the declining 200-day for about a month. The index retook the 200-day in June 2010, after a swift decline, paused, and then fell to new corrective lows.

The 200-day was overtaken in August 2010, and rolled over again. After the major correction in 2011, the “500” rose back above the 200-day for 2 days and then fell 9.8%. We saw similar price action in 2015 and 2016 as the late rally over the 200-day in October 2015 failed miserably.”