Investing Update: Why The 200-Day Moving Average Matters
Investing Update: Why The 200-Day Moving Average Matters
What I'm buying, watching & selling
This week saw the stock market enter correction territory. Both the S&P 500 and Nasdaq are down over 10% from their peak in July.
For the week, the S&P 500 was down 2.5%. The Nasdaq finished down 2.6%. Wednesday was the worst day of the year for the Nasdaq down 2.4% in a single session.
One wall of worry is that this sellofs is being led by mega-cap tech stocks. The Magnificent 7 stocks which have led the market all year are showing signs of breaking down. That brings some flashing red warning signs.
Here is where the Magnificent 7 are down from their highs.
Tesla -30%
Nvidia -18%
Amazon -17%
Apple -15%
Google -13%
Meta -12%
Microsoft -9%
Is this a buying opportunity or do they have further to fall? That depends on what your outlook is. One part about the end of October is that it’s the deadline for tax loss harvesting for mutual funds.
Ryan Detrick also points out that October 27th is historically the worst day of the year for the stock market. Dating back to 1950 shows that an average year for the S&P 500 bottoms on October 27th.
As we enter November, don’t forget that 10 out of that last 11 years the S&P 500 has been positive in November. The average gain is 3.1%.
GDP Surging
After the worst year of the year on Wednesday for stock market, Thursday brought some very positive news. U.S. economic growth accelerated in the third quarter. US GDP jumped from 2.1% in Q2 to 4.9% in Q3. The 4.9% marks the highest level since the end of 2021. If you removed the 2020-2021 COVID rollercoaster period, that’s the best level in nine years.
Below is a breakdown by component. Consumer spending took off. The nobody has any money left to spend crowd can go back in hibernation. People are employed and making money. Therefore they are spending money. It’s that simple and that’s why the whole recession narrative continues to be debunked.
Why Many Still Doubt This Bull Market
The bears continue to point to how this isn’t a true bull market. What they point to is how weak the rally has been. This chart below is what data they refer to.
These are what the S&P 500, equal weight index and small-caps have done one year after the bear market lows. As you can see this current rally really trails the other bull markets.
On the flip side of that, many forget what the stock market has all been through since 2021. There have been no shortage of reasons to worry or to be skeptical. But what has the market done? It continue to grind higher. The stock market has been extremely resilient.
Who The Rate Hikes Hurt
The one place where increased interest rates have really started to show up other than mortgage rates is in the interest rate small businesses are paying. As the chart below shows, small businesses are now looking at 10% interest rates. The highest level since 2001.
This is the type of change that will slow hiring and business expansion. When you hear the jump in the cost of capital for businesses, this is a perfect chart that illustrates what that means. If these levels stay and continue rising, it’s a worrisome sign for future economic growth and expansion.
Why 200-Day Moving Average Matters
What makes the 200-day moving average so important? Why do I continue to bring this up in my updates? Some readers have asked me why I pay so much attention to it. This comes up at the perfect time as the S&P 500 and Nasdaq both dipped below their 200-day moving average.
I saw what David Keller pointed out this week and he made a great point in regards to the 200-day. Explained perfectly.
Why are we so focused on $SPX remaining above its 200-day moving average? Because every major drawdown since the 2009 low has involved a breakdown through this important long-term trend barometer. "Nothing good happens below the 200-day moving average."
Then there was this from Callie Cox.
The S&P 500's 200-day moving average is an important line to watch, especially if you're not convinced we're in a bull market.
Since 1950, the S&P 500 has stayed above its 200-day MA in 80% of days during bull markets (vs. just 28% for bear markets)
The Nasdaq has less than 20% of its stocks above the 200-day. That the lowest going back to October of 2022.
The old adage that nothing good happens below the 200-day moving average does hold true. But this is also an accumulation point where investors have to continue stepping in to buy. We’re at a historical seasonality standpoint where history tells us the market has an upside from here but you’re also afraid of catching the proverbial falling knife.
Another big week of earnings is on deck with 164 of the 500 S&P companies reporting next week. A lot of eyes will be on Apple Thursday.
The Coffee Table ☕
Ben Carlson had a very good post called Stop Betting Against American. He takes a look at America compared to other countries. When we think things are bad here, we really have to zoom out and realize that just isn’t the case. Things are very good here contrary what all the gloom and doomers say.
I enjoyed Jesse Cramer’s piece 5 Common Failures in Personal Finance. A very thought provoking piece on how to view what we often fail at with our personal finances.
Last week it was highly recommended to me that I try The Maelstrom Bourbon. It’s made right here in Wisconsin and aged on Lake Michigan in a fishing boat. It’s new and highly sought after but I was able to get a bottle. It’s a low proof at 86.4% and is very light but smooth. It’s the best bourbon I’ve had under 90 proof. I’d love to try it as it ages and at higher proofs but they’re off to a good start.
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