Stock Market Checkup

Stock Market Checkup

The S&P 500 continues to move higher. It’s hard to argue against the slope of the line in the chart below. There’s plenty to be concerned about right now, but the stock market’s trend continues to point up. While last week was the market’s roughest week since earlier in 2021, we can’t base long-term investment decisions off one week’s performance. It’s September after all! The weakest month for stock performance historically, on average.

A Look Under the Hood

Last month we examined the advance-decline line of US Stocks as represented by the New York Stock Exchange. As a reminder, the advance-decline line is a market internal that measures the difference between the number of stocks that go up on a given day versus the number of stocks that go down on the same day. Obviously, the days where more stocks are rising versus those failing are good days while the opposite is generally true. An important note, the stock market can go up on days where more stocks are going down in price than up. That is what is called a divergence and can be a red flag, but it also can be noise. The trend in divergences is an important variable to monitor.

Moving Averages

Another market internal that merits monitoring is the percent of stocks trading above their 200-day moving average. A moving-average simply takes the average price of a stock on a given day for the period of interest. In this case, the moving average line represents the average price of whatever stock for the previous 200 days. Each point on the line is the average stock price for the previous 200 days. The 200-day moving average is significant because it represents a long-term trend line of approximately 10-months of market trading days. If this trend starts to point downward it can be indicating a weakening trend. The opposite can also be true.

The percent of stocks above their respective 200-day moving averages has been declining for all of 2021 after peaking in the fourth quarter of 2020. This is certainly something to keep an eye on as it can be signaling a general breakdown in the overall uptrend in the stock market. Some would argue the cat is out of the bag already. It may be, but the trend could stabilize and even reverse to the upside in the historically strong fourth quarter.

While the longer-term trend in individual stock prices has been weakening, the shorter-term trend, the percent of stocks above their 50-day moving average, is perking up after being in downtrend for the first half of 2021.

We’re currently and always in a period of uncertainty.  The trend in the stock market is up but market internals are mixed and could be pointing to ensuing weakness. Alternatively, the market could be taking a break after a strong run over several months before its next leg up. Nobody knows for sure. September may end up living to its choppy performance reputation, but a major downturn isn’t likely to commence with so many people anticipating and positioned for one right now.