Following a sharp decline of over 2%, the S&P 500 closed more than three standard deviations below its 50-day moving average on Monday. The only other two periods in the last four years where this has occurred were in August 2011 when the US lost its AAA sovereign debt rating and then in May 2012 during another sell-off related to Europe. The declines in May 2012 ultimately led to the famous proclamation from Mario Draghi in July 2012 that the ECB would do “whatever it takes” to protect the eurozone from collapse. One key difference between Monday’s sell-off and the prior two periods is the magnitude of the decline. In both prior periods, the S&P 500 saw much larger declines before it reached the three standard deviation oversold level. Due to the S&P 500’s tight trading range this time around, however, it hasn’t taken nearly as much of a drop to reach this degree of oversold.
In addition to the S&P 500’s three standard deviation close below its 200-day moving average, the DJIA also closed below its 200-DMA for the first time since late last year. What does that mean? Last night, we sent out a B.I.G. Tips report to clients highlighting the index’s performance following prior occurrences where the DJIA ended an extended streak of closes above its 200-DMA. Clients wishing to view the report can click here. If you are not currently a client and wish to subscribe, sign up for a free trial today.