In One Chart: The stock market’s thrashing in October left a scar—and here’s evidence

In One Chart: The stock market’s thrashing in October left a scar—and here’s evidence

It isn’t a secret that October was a punishing month for the U.S. stock market.


However, the severity of the beating for equity investors that resulted in the worst monthly decline since September 2011 for the S&P 500 SPX, +0.38% the sharpest monthly drop for the Dow Jones Industrial Average DJIA, +0.36%  since January 2016, and ushered in the Nasdaq Composite Index’s COMP, +0.43% first stint in correction territory in about two years, also left the equivalent of a tear in the tapestry of the market.


The 200-day moving average for the S&P 500 has started to slope lower, signaling that the October rout, indeed, has knocked the index from its uptrend. Market technicians view moving averages as dividing lines between bullish and bearish momentum in an asset, and a slip beneath that threshold can signal that a bullish trend has halted.


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The green line representing the 200-day moving average and the pink denotes the short-term 50-day average.

Bespoke Investment Group said the long-term downtrend for the S&P 500 (and really the broader market) began in mid-October: “It may be a bit hard to see in the chart of the S&P 500 below, but in the last two weeks, its 200-day moving average has started to turn lower, which is something it hasn’t done in over two years. Technicians place a lot of importance on a moving average like the 200-day because it tends to represent the longer-term trend,” wrote the analysts at Bespoke.


However, a downshift for the index doesn’t necessarily have to mean a cataclysmic outcome for investors, with stocks buffeted by myriad concerns. Those include questions about slowing global growth, a dimming outlook for quarterly earnings, looming rate increases by the Federal Reserve, and fears that current trend of economic expansion in the U.S. may be near an end.


Anxieties around the outcome of midterm elections, which are under way, also have weighed mightily on investors’ psyches lately.


Read: Opinion: This is what’s happened to stocks after every midterm election since World War II


Still, Bespoke said that the efficacy of the S&P 500 falling below its 200-day as an indicator of a market downturn has been mixed:



Just looking at the chart, two of these periods were followed by disastrous declines for the S&P 500 (2000 and 2007), and one period was a major false alarm (October 2004). The remaining occurrence was in August 2015, and while the S&P 500 saw a bit of turbulence in the months that followed, in retrospect, it proved to be a weak signal in terms of future declines.
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The upshot for Bespoke analysts is that the short-term performance of the S&P 500 when its 200-day slopes down, looking at data going back to 1928, has been better than average. However, those gains begin to fade six months to a year later.


“Six months later, the S&P 500 saw an average gain of just 0.9% and a median decline of -0.1% with positive returns less than half of the time. That compares to an average six-month gain of 3.7% for all periods since 1928,” the researchers wrote.


That may be bad news for stock-market bears.


Check out: Will midterm elections spark a boom in overnight trading?


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