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Rare Long-Term Buy Signal For S&P 500: Can We Trust It?

By Dr. Arnout ter Schure Stock MarketsJul 06, 2022 02:08PM ET
www.investing.com/analysis/rare-longterm-buy-signal-for-sp-500-can-we-trust-it-200626769
Rare Long-Term Buy Signal For S&P 500: Can We Trust It?
By Dr. Arnout ter Schure   |  Jul 06, 2022 02:08PM ET
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One must be living under a rock not to know the major stock indexes have been declining almost relentlessly during the first half of this year. I found that these indexes may be in prolonged bear markets (see here, here, and here). However, even in bear markets, there are plenty of opportunities to profit, even to the upside.

From that perspective, I found that the percentage of stocks in the S&P 500 above their 50-day simple moving average recently gave a rare signal: it went from below 2.5% to above 20% by June 24th. Green dotted vertical line in Figure 1 below.

Percentage Of Stocks In S&P 500 Above Their 50-Day Moving Average
Percentage Of Stocks In S&P 500 Above Their 50-Day Moving Average

Since data only became available in late 2002, this condition has only happened five times (see figure 1 above).

Although 20 years of data is not a very long record, considering the S&P 500 index has been around since 1957, it is still a periodic signal as it captures two bear and two bull markets.

Three of these conditions led to a shorter-term relief rally, followed by one last lower low several months later (2002, 2008-2009, 2011), whereas to were after immediate bottoms (2019 and 2020). The former three signals are shown with the green and red dotted arrows: the percentage of stocks above their respective 50-d SMA improved while price still declined, aka positive divergence.

Regardless, in all five cases, the SPX rallied for at least one year before the subsequent more considerable decline would set in and result in a new signal.Here are the performance details*

  • 2002: 15% downside risk over two months vs. 76% upside reward over 60 months
  • 2008-2009: 25% downside risk over 2.5 months vs. 40% upside reward over 16 months
  • 2011: 10% downside risk over 1.5 months vs. 145% upside reward over 86 months
  • 2019: no downside risk and 33% upside reward over 13 months
  • 2020: no downside risk and 75% upside reward over 20 months

*downside risk = from the day the signal was given to the secondary low.

*upside reward = from the day the signal was given to the high from where the next larger decline would start, resulting in a new signal.

Since the first two occasions were at the end of two bear markets (year+ declines with an >40% drawdown), whereas the other three occurred during the most recent bull market (only multi-month decreases of less than 40%), it is better not to lump these five signals together. It would be comparing apples to oranges.

Although, as they say, “past performance is no guarantee for future results,” especially since the markets could be in a bear market of a degree not seen since the 1930s, we must acknowledge there currently is a signal similar to those that led to outstanding longer-term low-risk, high-reward setups. Since trading and investing are not about opinions but all about having reliable entry- and exit signals while consistently placing portfolio-appropriate stops, the current condition could be one for the history books.

Rare Long-Term Buy Signal For S&P 500: Can We Trust It?
 

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Rare Long-Term Buy Signal For S&P 500: Can We Trust It?

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Comments (16)
Adam King
Adam King Jul 12, 2022 3:39AM ET
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Problem is Doc you talk a very good game but are very rarely right and you always leave the door open for your incorrect prediction to be "right" anyway because of your caveats - it's always the same with you - might go up,might go down, let the market decide by which time it's too late!
Dan Kyle
Dan Kyle Jul 12, 2022 3:39AM ET
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hes usually right actually, just works thru a longer time frame than you probably
Mean Aversion
Mean Aversion Jul 12, 2022 3:39AM ET
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Dan Kyle  Most of his predictions are bullish and the US market almost always goes up over longer timeframes, so of course his bullish predictions will be proven right in time.
Dr. Arnout ter Schure
Dr. Arnout ter Schure Jul 12, 2022 3:39AM ET
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Dan Kyle  thank you!
Jesus Iglesias
Jesus Iglesias Jul 08, 2022 10:32AM ET
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Thank you very much, Doctor. More ideas: S&P 500 --> Chart: 1Month -->  Bottom  3840-3233 ? -->  Chart: S&P 500 (1M) and Fibonacci retracements: https://invst.ly/yhoc3
Joe Bull
Joe Bull Jul 07, 2022 9:24AM ET
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“I found that these indexes may be in prolonged bear markets” Yeah, after your prediction in February of a new ATH failed miserably. Good call, Doc.
Dr. Arnout ter Schure
Dr. Arnout ter Schure Jul 07, 2022 9:24AM ET
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Sigh… still living in the past aren’t ya!? Nobody only makes correct calls. I am only human. Get over it. Move on. Take these 5 historical signals’ returns for what they are and stop bitching, moaning and complaining. That goes for most of you on here btw. Bunch of losers.
Mr Doodl
Mr Doodl Jul 07, 2022 7:58AM ET
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Well as your prevoius excellent analysis shows, the wedge pattern of Nasdaq 100 is about to be broken to the upside with pos. divergence of mom. indicators. I agree with it.
Dr. Arnout ter Schure
Dr. Arnout ter Schure Jul 07, 2022 7:58AM ET
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Thank you! While most on here only complain and spee negative comments they forget in their hatred what matters.
Mr Doodl
Mr Doodl Jul 07, 2022 7:58AM ET
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Dr. Arnout ter Schure  You are very welcome! I appreciate your work!
FOX MAN
Foxman Jul 07, 2022 7:14AM ET
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Yes censored…..manipulation and lies….
tom paj
tom paj Jul 06, 2022 11:47PM ET
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where is my prior post??? censored??/
Kool Aid
Kool Aid Jul 06, 2022 11:19PM ET
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As always, thanks Doc!  Interesting data point.  Good to see some improving breadth in the market.  Makes sense that a good bounce in breadth could be a good signal.     For all the haters... geez... it's one data point.  He's not saying bet the farm on this data point.
Adamo Nals
Adamo Nals Jul 06, 2022 10:43PM ET
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Again most of you on here probably millennials or generation Z. I’ve been through 35+ years of markets. This is the biggest bubble I have ever seen in my life. It makes the early 80s withinflation with tame. It makes Jimmy Carter look like a good president. We are in the second or third inning of inflation only. Ram that threw all of your heads. There’s still 20 to 35% down in the markets especially the S&P 500. You need to be buying as much energy exposure as you can. It’s a super cycle. When you have an administration at war with fossil fuel it’s an easy call. Oil goes higher inflation goes higher
Adamo Nals
Adamo Nals Jul 06, 2022 10:40PM ET
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It’s very simple. $200-$215 a share times 14 X equals 2700 to 3000. That’s your bottom or Apple at 100 or less or Microsoft between 175 and 200. Oil is going so much higher people have it completely wrong. There is just not enough supply and too much demand. This was just profit taking in oil. Buy as much energy exposure and SPY puts as you can. Because this market is not even close to bottom. Peak earnings not peak inflation
Steve Bojo
Steve Bojo Jul 06, 2022 10:32PM ET
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Nope. Trend is still down
 
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