What does this event mean for the market? Keeping in mind that anything is possible with the market going forward, a break below the 200 day moving average is a bearish development and I will present some evidence in support of this.
The blog All Time High Stocks breaks down a study which, among other things, backtests the performance of a buy and hold strategy versus a very simple strategy of buying the market when it is above its 200dma and selling when the market crosses below.
The study backtests the S&P 500 from the year 1928 to 2010. Interestingly, the average annual rate of return for the market for buy and holders was only 4.86% during this 82 year period. But what if you were only invested during the times when the market was above its 200dma? Your average rate of return more than doubles to 10.29% annually.
The study also performs the same backtest to several other global markets, and I have summarized the findings in the table below:
On average, just being invested in up-trending markets, simply defined by the 200dma, doubles the rate of return relative to buying and holding.
While there are other simple systems that perform even better, learning to get out of a market, stock, commodity, mutual fund etc... when it crosses below its 200dma is a good start.
