The 200-Week Moving Average in Market History

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Includes: DIA, QQQ, SPY
by: Doug Short

Over the past few days I've seen several references to the fact that both the Dow and S&P 500 weekly closes are in the vicinity of their 200-week simple moving averages (SMA). I've spent some time studying this indicator in both indexes, and I've extended my investigation to the Nasdaq 100 and the Nikkei 225.

S&P 500
Since its creation in 1957 until the top of the Tech Bubble in 2000, the S&P 500 has generally trended above the 200-week (SMA). The bear market declines are responsible for the few occasions when the index dipped to or below the 200-SMA — most notably in 1968-1970 and 1973-1974.

Here's a chart of the index weekly closes since 1950 with the 200-SMA (the S&P 500 is spliced with the earlier S&P Composite). I've highlighted bear-market declines and recessions, and I've given a "real" alternative view to indicate the amount of nominal performance that is inflationary illusion:

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With the Tech Crash and Financial Crisis of the 21st century, the S&P 500 has spent extended periods below the 200-SMA. After nearly two years below the indicator, the latest weekly close brings the index within a fraction of the 1225 level of the current 200-SMA. Will it break to the upside or encounter resistance?

Dow
Here's a comparable chart of Dow weekly closes, where the 200-SMA is similar to what we saw in the S&P 500:

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The Dow generally trended above its 200-week moving average until the mid 1960s. From that point until the 1982 low, the index seemed to oscillate around the 200-SMA, which had essentially flatlined. In fact, the real (inflation-adjusted) Dow had entered a savage decline, as the lower area chart illustrates. Since the 1982 secular bottom, the Dow remained above the 200-SMA until 2001, when it again began oscillating around the SMA. The latest (April 23rd) close at 11.204.28 put the index fractionally above the 200 weekly SMA, which is around 11,134.

Nasdaq 100
Over the past several months, the Nasdaq 100 (NDX) has offered an upbeat variation from the S&P and Dow. Because of the shorter time line for this index, I've switched to a linear scale, which rather dramatizes the Tech Bubble and crash:

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NDX had been above the 200-SMA for over ten years until the Tech Crash submerged it for 187 consecutive weeks (3.6 years). It finally surfaced in September 2004 and remained above the indicator for four years until September 2008. The Financial Crisis put NDX below the 200-SMA for nearly a year (51 week). It ultimately surged above the 200-SMA in late 2009, but not without a few weeks of struggle. The arrows in the inset show some close encounters with the 200-SMA over the past few years, and the weekly closes intersected the SMA five times in eight weeks to achieve its current position above the 200-SMA.

Nikkei 225
Now let's see how the 200-SMA looks on the Nikkei 225 over the same time frame as our snapshot of the Nasdaq 100. This index also experienced a severe bubble, and twenty years later it remains more than 70% below the 1989 high. This scenario is precisely what U.S. policy makers and investors around the world are hoping to avoid.

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The Dow Since 1900
Finally, let's have another look at the Dow, this time all the way back to 1900. The ovals show extended periods when the 200-SMA flatlined on a nominal chart. With the Dow now fractionally above the 200-SMA, the question is whether or not the rightmost oval is soon to be closed. For the Nasdaq 100, the latest encounter with the 200-SMA was an eight-week nail-biter. So it's probably too soon to break out the Champagne.

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We'll review this series of charts every month or so.