Original title: note that US stocks are deviating significantly from these two averages.
Source: Jinshi data
Analyst Lance Roberts recently wrote about the risks of U. S. stocks.
He first pointed out that the S & P 500 had achieved positive returns for six months in a row. As shown in the 10-year monthly chart below, such successive gains are rare, and each time they occur, they usually begin to fall for a month or more.
It is also worth noting that the S & P 500 has now deviated significantly from its 200-day moving average. This is a key level.
Why is the 200-day moving average important?
As shown in the chart above, the 200-day moving average is a technical indicator used to analyze long-term trends. This line represents the average closing price over the past 200 days. Generally speaking, the 200-day moving average represents the critical point at which stocks are suitable for long-term holding, and it is an extremely important indicator of risk management.
In the short term, fundamentals don't matter. This is because it is investor psychology that drives prices up or down in a relatively short period of time, such as days, weeks or even months. Therefore, we can look at the technical side to determine the current level of market activity.
The moving average acts like gravity on prices. Prices may deviate from the moving average, but eventually return to levels near the moving average. As analysts say:
"deciding when to sell stocks to lock in profits can be very difficult, especially if you have accumulated long-term or short-term capital gains. At this time, you can observe where the stock is on the 200-day moving average, which can at least help you decide when to make a partial profit. "
The S & P 500 is now more than 11% above its 200-day moving average, which should be a warning to investors. Because historically, corrections have usually occurred as long as the deviation exceeds 10% above the 200-day moving average.
Since November last year, US stocks have shown a relatively stable period. During this period, the 50-day moving average has been an important support and observation point for the S & P 500 as speculative buyers use the "bargain-hunting" strategy to chase the market. However, due to a surge in the number of "bargain buyers", US stocks rose sharply, deviating sharply from the 50-day moving average.
At present, the 50-day moving average is above the 200-day moving average. Once prices fall, the S & P 500 is not only likely to fall back below its 50-day moving average, but even the likelihood of falling below its 200-day moving average is rising.
In Bank of America CorporationAccording to a recent report:
SPX (S & P Index) the daily closing price in 2021 is no lower than its 200-day moving average (MA).
From 1929 to 2021, the S & P 500 exceeded its 200-day moving average 35 times in half a year, while it exceeded its 200-day moving average only 13 times a year. That means 21 times the S & P 500 fell below its 200-day moving average in the second half of the year. According to historical data, the average and median pullback in the second half of the year is between 6.9 and 10.6 per cent.
Of course, the S & P 500 is likely to stay above its 200-day moving average for the rest of the year. As Bank of America Corporation summed up:
"if the S & P 500 stays above its 200 days, 2021 will be the 14th year since 1929."
At present, however, the biggest single risk facing the market is the Fed.
Earlier, Federal Reserve Chairman Powell also pointed out that the Fed has made "substantial progress" in achieving its goals of full employment and price stability, thus laying the foundation for a reduction in bond purchases. The July employment report is robust and provides evidence for it.
So the Fed is likely to openly discuss reducing monetary support at the upcoming Jackson Hole summit. This may even include an overall timetable for the reduction process to maintain market stability. Phasing out quantitative easing is the first step towards normalizing monetary policy.
The related signals could trigger a liquidity contraction, which is risky for an extremely bullish market. Investors have previously adopted highly leveraged strategies and heavy positions in stocks, which may cause a "stampede" when the market falls.
At present, investors need to pay particular attention to the 50-day moving average. If it falls below this key support, it will not be too far from the test of the 200-day moving average.