Market conditions: number of stocks above 200-day moving average
It’s no secret that the stock market was hammered hard last year. For me, the significant downtrend started in early 2021 and has been going strongly nowhere but down across the board since then. Sure, you had an occasional stock pop, and a few sectors like energy and mining, to name a few, had some success. But overall, it’s been brutal. I have been patiently sitting and waiting for signs of improvement, and one of the indicators I watch is the number of stocks above their 200-day moving average price. Take a look at this picture:
This shows the % of stocks that are above their 200-day moving average. For the first time in over a year, we see a 50% threshold crossed (solid horizontal blue line), and I am intrigued by this occurrence. You can see how all of 2022 was spent with the number of stocks above the average decreasing, reaching the low point of just 16% of the market being above that average in late September.
Why is a 200-day moving average significant? If you read some of the more popular books on stock trading, many investors and traders pick 200-day moving average as a sort of “big picture” gauge of the stock’s health. If stock is trading above its 200-day moving average, many will be comfortable owning the stock or getting involved with it. If it’s below 200 day moving average, many traders stay strictly away. There is a saying that “nothing good ever happens under 200 day moving average”. For example, one of the legendary stock traders, Stan Weinstein, has written a widely-read book “Secrets for Profiting in Bear and Bull Markets” and 200-day moving average (or 40 weeks) is a crucial component of his strategies. One other thing to add, in addition of the price being above the average, it’s desired for that average line to be sloping up and not down.
It’s a welcome sign to see the market reach this point. The character of the markets could be changing from constant drubbing to perhaps one where we see more and more stocks find support. But I would avoid getting too excited and jumping all in. Here is why.
Stocks are most likely reaching his point because of “time” and not because of “rising stock prices.” When the stocks fell off the cliff in 2021 and 2022, they went far below the average, and the continuing drops have decreased, but the stocks themselves might still be meandering in their 52-week low price points, and the average is catching up to them. Even a small bump in price will push them over the average.
This is a welcome sign, and I am happy to see some stirring up, but we still have a lot of work to do before we see a “bull market.” This is closer to correction happening because of the passage of time. I will be interested to see how this trend holds up in the next few months. It would feel positive if we saw a minor pullback and a continuation upwards.
