Another Warning Sign for U.S. Equities?

March 04, 2016

With U.S. equities posting their worst start to the year since 2009, opinions surrounding the path that equity markets will take during 2016 vary substantially. February saw a return to positive performance, yet equities remain in negative territory year-to-date. Based on company or economic specific fundamentals, a case can certainly be made to support further market appreciation. However, an alternative method to analyze the stock market is technical analysis. This approach focuses solely on the price movements of a stock or index. The underlying thesis behind this kind of analysis is that fundamental data is already factored into a stock’s price.

The chart above shows S&P 500 index price levels from January 1999 through February 2016. Its 10-month and 20-month moving averages are plotted alongside it. Analysis of moving averages helps to identify bullish or bearish signals in the market. When the shorter time period moving average falls below the longer time period moving average, this indicates that negative price momentum is occurring and likely to persist. Conversely, when the shorter time period moving average rises above the longer time period moving average, this indicates that positive price momentum is occurring and likely to continue.

Over the time period shown, the 10-month moving average has only experienced a negative crossover event below the 20-month moving average on two occasions: March 2001 and May 2008. In both of these instances, equity markets subsequently experienced a significant decline. At the end of February 2016, the 10-month moving average officially crossed below its longer-term 20-month moving average. Utilizing this method of market analysis, equity markets may be signaling the early stages of a market drawdown. Only time will tell if this prediction actually comes true. However, as dire as this analysis may seem, it is important to note that equity markets have historically provided strong returns over the long term despite an occasional pullback.

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Related Content

04.11.2024

First to Cut: The Fed or the ECB?

Based on implied probabilities derived from options markets, investors are currently forecasting an 82% chance that the European Central Bank…

04.10.2024

1Q 2024 Market Insights Webinar

— LIVE WEBINAR APRIL 25 — Please join Marquette’s research team for our 1Q 2024…

04.01.2024

Sweet and High Up

Chocolate eggs and bunnies may have appeared more expensive to shoppers this Easter weekend, as the price of cocoa futures…

03.27.2024

The Crystal Ball Has Clouded

Last month, Marquette published a Chart of the Week that highlighted the aberrational length of the current…

03.26.2024

Assessing the Likelihood of a Recession and Understanding the Impact on Portfolios

Is a recession coming to the U.S.? It’s a question that has been asked since 2022, as the Fed’s rapid…

03.21.2024

The Dynamic Duo

In 2023, investors were stunned by the robust performance of seven prominent mega-cap stocks deemed the “Magnificent Seven.” Largely beneficiaries…

More articles

Subscribe to Research Email Alerts

Research Email Alert Subscription

Research alerts keep you updated on our latest research publications. Simply enter your contact information, choose the research alerts you would like to receive and click Subscribe. Alerts will be sent as research is published.

We respect your privacy. We will never share or sell your information.

Thank You

We appreciate your interest in Marquette Associates.

If you have questions or need further information, please contact us directly and we will respond to your inquiry within 24 hours.

Contact Us >