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Be careful if you use the 200-day mean to determine how a trading stock is doing

There is not a significant bullish factor if the U.S. market closed above its 200-day moving average.

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KEVIN HULBERT

If anxious bulls are waiting for the U.S. stock market to break above its 200-day moving average, their wait will be in vain. I don’t say it because I somehow know the market won’t close above its 200-day average price. My argument is that even if it does, it won’t have any especially bullish implications.

This week, stock traders are considering the implications of the 200-day moving average because the market’s recent strong advance has pushed it to within hearing distance of that average. The S&P 500’s intraday high on Tuesday of this week was just 0.02% below this bar. According to FactSet data, the index was 0.9% below its 200-day moving average as of Thursday’s close.

I examined the S&P 500 (or its predecessor index) back to the mid-1920s to evaluate whether closing above the 200-day moving average has any importance. The days the index first closed above its 200-day moving average were the ones I paid close attention to. The findings are summarized in the table below.

the following month the following quarter following six months the following 12 months Buy indications from the 200-day moving average 0.9% 1.2% 2.9% 6.0% every other day 0.6% 1.8% 3.6% 7.4%

As you can see, the market has performed a little bit better over the past month after indications to purchase from the 200-day moving average. Even if this supports Wall Street’s optimistic interpretation of a close above the 200-day moving average, take note of the information in the other three columns: On average, the market performs somewhat worse after receiving such signals throughout the ensuing quarter, six months, and twelve months. This is clearly at odds with the bullish view.

Be aware that none of the differences displayed in this chart are significant at the 95% confidence level, which statisticians frequently use to determine whether a pattern is real, before you jump to the conclusion that the 200-day moving average is wrong. Therefore, the data does not support either the bullish or the bearish view.

The 200-day moving average may still be advantageous to traders if used in conjunction with other indicators. For instance, a 200-day moving average buy signal can indicate one thing when the market is undervalued or when interest rates are falling, and a different thing when they are increasing or the market is overvalued.

I’m dubious. The ones I evaluated revealed that any predictive value the indicator combination had was due to those other indications and not the 200-day moving average, despite the fact that I was unable to analyze every potential combination of the 200-day moving average with other indicators.

The final word? The stock market’s position in relation to its 200-day moving average will not affect how it performs going forward.

MarketWatch frequently features Mark Hulbert as a contributor. Investment newsletters that pay a set price to be audited are tracked by His Hulbert Ratings. His email address is mark@hulbertratings.com.

Don’t forget: On September 21 and 22, Carl Icahn will be speaking at the Best New Ideas in Money Festival in New York. The renowned trader will share his thoughts on the crazy market trip this year.