Last Thursday and Friday, the S&P 500 briefly dipped below its 200-day moving average (DMA)—but failed to close beneath it. Why does this level matter? Because historically, nothing good happens below it.
Why the 200-Day Moving Average Matters
The 200-DMA is simply the average price over the past 200 trading days. Markets tend to perform well above it and struggle below it. It’s one of the best long-term trend indicators in risk management. But as a timing tool? Not so much.
It won’t tell you when to buy or sell with precision, but it helps avoid catastrophic drawdowns—think the dot-com bubble or the GFC. However, just because the S&P 500 crosses below the 200-DMA doesn’t mean a bear market is imminent.
A Little History
Since 1970, the S&P 500 has traded above its 200-DMA 72% of the time.
84% of total market gains came when trading above the 200-DMA.
Shorting every time it dropped below? A losing trade 92% of the time.
Clearly, investing above the 200-DMA is a solid long-term strategy, but blindly reacting to every cross isn’t. So, when should you take notice?
The Key Factor: Are We in a Recession?
When the S&P 500 breaks below the 200-DMA during a recession, cumulative returns are -61%.
When the same breakdown happens outside a recession? Returns are +142%.
So, the real question is: Are we in a recession today?
I don’t think so. Trade accordingly.
