Bloomberg News

S&P 500 Stocks Failing Moving-Average Test: Technical Analysis

July 03, 2012

Gains that drove the Standard & Poor’s 500 (SPX) Index to its biggest June advance since 1999 may falter because too few stocks are rising with enough speed, StockCharts.com Inc. said.

The benchmark gauge of American equities surged 2.5 percent on June 29, finishing the month up 4 percent, amid optimism that European leaders will prevent bank losses from multiplying. While the rally drove 64 percent of shares above their average price during the past 50 days, that’s short of the 85 percent threshold that usually accompany longer rallies, said Arthur Hill, a technical analyst at the Redmond, Washington-based firm.

“A surge above 85 percent shows strong-enough buying pressure to suggest that an uptrend is emerging,” Hill wrote in a note yesterday. “It is like a rocket lifting off the launch pad. A strong up-thrust is needed to insure a sustainable advance.”

Concern that Spanish banks might fail and Greece would leave the 17-nation euro zone drove the S&P 500 down as much as 9.9 percent from a four-year high in April. The benchmark index climbed 2 percent last week as euro-area leaders agreed to relax conditions on emergency loans for Spanish banks and possible help for Italy. Even after the rebound, the benchmark gauge was down 3.3 percent since the end of March, the worst performance since last year’s third quarter.msg

While 85 percent is where momentum becomes self-sustaining, equity declines are likely to speed up when the number of stocks above the 50-day mean slips below 15 percent, Hill said.

The gauge decreased below 15 percent on May 18 for the first time since Oct. 3, when the S&P 500 hit its 2011 low and began a six-month, 29 percent rally. That advance lifted more than 85 percent of the stocks in the S&P 500 above their 50-day mean in October and again in January, according to data compiled by StockCharts.com.

To contact the reporters on this story: Lu Wang in New York at lwang8@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net


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