What Can We Glean from the S&P 500 Index and the 10-Week Indicator?

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Since broad domestic equity indices posted a bottom on March 23rd, they have not looked back. In fact, the S&P 500 Index (SPX), Nasdaq Composite Index (NASD), and Dow Jones Industrial Average (DJIA) have each rebounded with price returns in excess of 30% (data beginning 3/23/20 through 5/27/20). As a result of this upward movement a number of indicators on the Nasdaq Dorsey Wright Research Platform have turned positive, yet perhaps none more so than the ten-week indicator for the S&P 500 (TWSPX). The TWSPX measures the percentage of stocks in the S&P 500 that are currently trading above their 10-week (50 day) moving average. With an intraday calculation of 95.64% on Thursday (5/28) TWSPX posted its highest reading ever, signifying that over 95% of securities in the S&P 500 are trading above their 10-week moving average. While this may sound ominous to some, the data suggests otherwise as we note generally positive returns following TWSPX movements above the 90% threshold, with almost all observations rolling positive within nine months.

The returns above are index returns, inclusive of dividends but not inclusive of potential transaction costs. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

In a similar vein, when first highlighted several weeks ago as a developing story, SPX managed to get 10% above its 50-day moving average last week (5/27). This event is also rare, only occurring six times since 1955 (April 2009, November 1998, February 1991, September 1982, January 1975, and July 1955). Respective performance for the S&P 500 (as perhaps anticipated at this point) is also positive, with all returns in the black six months out.

The returns above are index returns, inclusive of dividends but not inclusive of potential transaction costs. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

While the events surrounding TWSPX and the 50-day moving average for the S&P 500 are certainly promising, they are not a silver bullet nor a guarantee of the past repeating itself. It is also worth noticing that events like these are infrequent, resulting in a small sample size to build from. However, the findings here do evidence that demand continues to reenter the equity markets, positively contributing to the weight of the evidence.

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Dorsey, Wright & Associates, LLC, a Nasdaq Company, is a registered investment advisory firm. Registration does not imply any level of skill or training.

Unless otherwise stated, the performance information included in this article does not include all potential transaction costs. Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

Nothing contained within the article should be construed as an offer to sell or the solicitation of an offer to buy any security. This article does not attempt to examine all the facts and circumstances which may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this article. It is for the general information of and does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation (express or implied), investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice.

Dorsey Wright’s relative strength strategy is not a guarantee. There may be times when all assets are unfavorable and depreciate in value. Relative Strength is a measure of price momentum based on historical price activity. Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon to be successful or outperform any index, asset, or strategy.

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