Stock Market Update: Have We Reached Cruising Altitude Yet?

The Higher The Better

The S&P 500, from take-off at $2346.58 on December 26 to $2743.35 today, has finally risen to its 200-day simple moving average – almost 400 points in less than 8 weeks. For many traders and investors, what happens above the 200-Day MA is bullish and below is bearish.

This Maginot line serves as both a health indicator as well as a magnet. So now that we have traveled up this far, are we at Cruising Altitude yet?

One of the central reasons behind aircraft altitude is that as the air gets thinner with every foot climbed, planes can travel more easily and therefore move faster and burn less fuel, saving money. We saw this flying metaphor in full effect leading into the most recent SPX top of $2941 on September 21, 2018. This leading index had not spent any (meaningful) time below the 200D since 2016 – when it was $1833. That’s a 1131 point run! Sure, there was turbulence (aka XIV Implosion) in Jan-April of 2018, but this flight path never dropped below Cruising Altitude!

Now as we re-engage with this “sweet spot” of flying, we need to keep in mind: too high and the oxygen becomes too sparse to fuel the engines; too low and the air resistance is greater. The optimum altitude for a plane is based on its weight. In the case of a stock, it’s value. Keep in mind, heavier planes will fly lower, and lighter planes higher.

And boy can we see this analog in those SaaS/Cloud plays that have flown well above Cruising Altitude and look like they will climb forever! Think: TWLO, WDAY, TEAM, COUP, MDB, SPLK, and many many other Flying Unicorns valued in the Billions of market cap despite revenues at a fraction of that.

It comes down to this in aviation-speak: the higher the cruising altitude, the lighter the aircraft due to less drag, fuel usage and thinning air. (It’s not called “Blue Sky” trading for nothing!!) But life in the stratosphere, can cause engines to struggle as the oxygen levels fall.

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