MW The S&P 500 just did something for the first time in months that a rally in the stock market could follow

By Isabel Wang

The 200-day moving average for the S&P 500 is the line in the sand between a sentiment-driven rally and a durable climb to new highs, says one strategist

A stock-market relief rally on Monday put the S&P 500 SPX on pace to finish above its 200-day moving average - a level widely seen as a proxy for its long-term trend - for the first time in over 30 trading sessions.

History suggests that fears of a prolonged dip below that closely watched level, which is often seen as a sign of big trouble for the market, may be misplaced.

The S&P 500 on Monday was surging over 3%, to trade at around 5,831 as of 3:10 p.m. Eastern time. The index was climbing above its 200-day moving average of 5,749.44 after hovering below that key technical threshold for its longest stretch since 2022, according to Dow Jones Market Data.

A common refrain among stock-market technicians is that the longer an index holds below the widely watched 200-day moving average, the more dangerous the market conditions would be for investors, and it implies weakening market strength in the long term.

But history shows that, since 1929, when the S&P 500 drops from at least a three-year high and then stays below the 200-day moving average for at least 30 trading sessions, it is often followed by strong returns for the large-cap benchmark index in the months and year ahead, said Jason Goepfert, senior research analyst at SentimenTrader.

The table above shows the S&P 500's performance following each time it cycled from at least a three-year high to holding at least 30 sessions below its 200-day moving average.

Since 1929, the S&P 500 has typically gained a median 4.1% in the three months after spending over 30 days below its 200-day moving average following a drop from a three-year high. The index has also registered a median double-digit returns over the following 12 months, according to data compiled by SentimenTrader.

To be sure, the S&P 500 did experience "tough times" with double-digit losses suffered over the following year, most notably in 2000 and 2008, Goepfert said in a Monday client note.

"But most of the time, of course, that did not happen. Even though its average return and risk/reward weren't impressive over any time frame, they were mostly positive from two months and beyond," he said. "Most cycles from new highs to 30 days below average soon recovered," Goepfert added.

That's also why Goepfert challenged the common market belief that stock-market conditions must follow certain bearish patterns just because the S&P 500 remains below a technical threshold. "The idea that we're more likely to crash, or suffer a protracted bear market, simply because the most followed index in the world hasn't yet made it above its most widely-watched technical indicator, is mostly bunk," he said.

"A decent heuristic we've seen lately is that if stocks lose a further 3% to 5% following these patterns, something rotten is more likely to occur. The worst conditions tend to see near-immediate failures after such conditions, so that will be something to watch in the weeks ahead," Goepfert said.

See: Opinion: The stock market is cheering the U.S.-China trade deal, but the damage is done

Stocks were staging an epic rally on Monday after the U.S. and China agreed to suspend some tariffs for 90 days as the world's two largest economies sought to navigate a path forward amid a bruising trade war. Their joint statement on Monday said that "reciprocal" tariff on U.S. goods will be cut to 10%, while it will fall to 30% for products from China.

The Dow Jones Industrial Average DJIA was up over 1,000 points, or 2.6% as of 3:10 p.m. Eastern time, while the Nasdaq Composite COMP was popping 4%, on pace to exit bear-market territory, according to FactSet data.

See: Cooling U.S.-China trade tensions don't mean smooth sailing for U.S. economy

Monday's stock rebound has also left investors questioning the sustainability of the relief rally as a cooling trade tension between the U.S. and China doesn't necessarily mean smooth sailing for the economy.

"For now, watch the S&P 500's 200-day moving average for clues on whether these higher prices will stick," said Callie Cox, chief market strategist at Ritholtz Wealth Management. "In past recoveries, the 200-day was the line in the sand between a mood-driven rally and a durable climb to new highs," she told MarketWatch in emailed commentary on Monday.

"Also, keep in mind that recessions often lead to long and destructive selloffs fueled by losses in income and lower profits [for corporations] ... We may not be there yet, but this is a scenario you can't rule out," she added.

-Isabel Wang

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May 12, 2025 15:37 ET (19:37 GMT)

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