Reclaiming The 50-Day Not All It's Cracked Up To Be

12/17/08 9:10 AM EST

Good Wednesday morning...we begin the day with some weakness in the pre-market futures as the headlines continue to contain nothing but bad news.  They're well off their lows of the day, but still in negative territory.  Most of the macro tells (currencies, commodities, fixed income, foreign equity markets) are showing muted overnight performance...except bonds.

We're once again seeing tremendous buying pressure in (government-backed) paper, driving yields to unbelievably low levels.  I'm not convinced that this is entirely, or even mostly, due to risk-aversion on the part of investors, but I'd still prefer to see bond yields and commodities rise, and the Yen fall, to be a bit more comfortable that large traders are shifting their allocations back to stocks.

There were several extraordinary developments yesterday, most of them on a fundamental basis.  Sentiment-wise, most of our indicators didn't move a whole lot except those that have the very shortest of time frames.

Technically, though, the market (i.e. the S&P 500) did accomplish something which is getting quite a bit of attention - it closed above its 50-day moving average.

Personally, I don't pay much attention to common moving averages other than to get a general sense of the market's trend.  If the 200-day moving average is sloping down, then we're in a bear market, if it's heading higher, then we're in a bull market; if the 50-day average is moving down, then we're in an intermediate-term downtrend, if it's up then we're in the midst of a multi-month rally.

That's it...not because I have any kind of grudge against moving averages, just because after years of testing and personal experience, that's all the value I've found in them.

I find no utility in averages in terms of whether price is above or below, and I couldn't care less about using the averages as support or resistance levels.  I have found no use for either over the years.  But others do, and yesterday's close above the 50-day moving average in the S&P 500 is garnering a lot of (positive) attention for the index.

As we can see from the chart above, this is the first time in more than a quarter (72 trading days to be exact) that the index has managed to close above its intermediate-term moving average.  We'd have to go back more than six years to find another stretch of time when the index was below its 50-day for longer than 72 days.

So let's do that.  Let's go all the way back to the index's infancy and find every time since 1928 when the S&P was under its 50-day moving average for more than 70 consecutive days, then crossed above it, and see how the index performed going forward.

On average, these stretches had lasted 83 days, so we're not too far off from that now.  Unfortunately, though, there isn't much for the bulls (or the bears, for that matter) to hang their hat on going forward.

There was a very slight tendency for the index to retreat over the short-term, bounce back over the next month or so, then retreat again in the intermediate-term.  Three months later, the index was higher only 35% of the time, which is considerably weaker than random.  Not surprisingly, every one of these occurrences happened during bear-market environments (a downward-sloping 200-day moving average).

That isn't particularly good news, since we've been going over a multitude of studies over the past couple of weeks that suggested at least modestly higher prices over the next one to three months (like here and here and here).  The 50-day moving average study from above certainly doesn't rule out a rally lasting a month or so, and given the others we've discussed I'm still giving weight to the idea that we'll see higher prices in that time frame.

For the short-term, yesterday afternoon we touched on the fact that a few of our short-term guides were hitting overbought levels, the indices were pushing towards possible resistance at last week's highs and the market has a tendency to suffer post-Fed withdrawal over the next one to four sessions.  If we couldn't climb over last week's highs by this morning, then I was looking for the typical short-term pullback to begin.

We're seeing some of that this morning and last week's highs are still my major focus from here.  I have a few layers of possible support I'm watching in the S&P, those being 880, 865 and 850.  I expect the index to hold above the latter two at least on any short-term pullback, and would be concerned about the intermediate-term if the last level fails.  Barring that, I think we have room to work 10%-20% higher in the coming month(s).