Bull Vs. Bear. The Line In The Sand?

On Tuesday, February 5 and again on Wednesday, February 6, the S&P 500 bumped into its 200-day moving average. While I'm not exactly sure why this particular indicator captures the attention of so many (there are a myriad of more effective trend-following tools readily available), the crossing of the 200-day is viewed as a big deal. Some go so far as to say the moving average represents a line in the sand between the bulls and the bears. As in, if the current price of a security or index resides above its 200-day, it is considered a bull market and if below, a bear market.

Personally, I don't subscribe to such a view. However, it is worth noting that a great many investors, including throngs that get paid to invest other people's money, do see the 200-day as a critical line of demarcation. Thus, how the market acts when it approaches its 200-day is viewed as important.

So, what was the market's reaction when the S&P 500 "tested" its 200-day for the first time in 42 days? See for yourself...

S&P 500 - Daily

View Large Chart

While I wouldn't call it an abject failure, the index did pull back a bit after flirting with the all-important line in the sand for a couple days. So, the question, of course is what, if any message should we take from the initial "bonk" at the 200-day?

The Bull's View

Always optimistic, those wearing their bull caps last week viewed the action as positive. The words "a pause that refreshes" were bandied about quite a bit in the bull camp. After all, even the most ardent bull will admit that stocks have run a long way in a short period of time, that the indices are overbought, and that sentiment has rebounded quite a bit. As such, a brief respite before the real run for the border begins certainly makes sense.

I'll add that last week's intraday action was pretty darn good. With stocks overbought and bumping into resistance, the bears could have easily grabbed control of the game and proceed scare the bejeebers out of everyone again based on some of the headlines.

If you will recall, there was the declaration that Trump wasn't planning on meeting with China's Xi Jingping before the March 1 tariff deadline (initial positioning?). There were some not-so-hot economic data. And there was word that global growth appears to be slowing more than expected.

It Isn't The News, It's...

But as the saying goes, it isn't the news, it's how the market reacts to the news that is important. And yes, stocks did fall on Thursday and opened lower again on Friday. But given that the market rallied fairly vigorously off the lows on both days, one has to be impressed that the bulls were not run over and actually held their ground rather nicely.

Tape readers tell us that this was "good action" and therefore, we should expect further rally attempts in the coming days.

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Disclosure: At the time of publication, Mr. Moenning held long positions in the following securities mentioned: none - Note that positions may change at any time.

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