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A New Self-Fulfilling Prophecy

I was still in graduate school when the self-fulfilling prophecy of the 200-day moving average was forged by financial media. After nearly 30 years they have not changed the narrative. Maybe it is time for a change and I have a proposal to make.

It’s been almost eight years since I started this blog. I have learned a lot from some very good people along the way and, as they say, some have learned a few things from my articles.  This is what I wrote in December 2011 about the 200-day moving average:

It is just a self-fulfilling prophecy. In the 1980s financial media (FNN now CNBC) and analysts reinforced the importance of the 200-day simple moving average by constantly referring to it. Actually, they raised it to the status of an indisputable principle.

Those early financial reporters and the people they invited were so amazing in presenting technical analysis as a set of indisputable rules. Listening to them was a torture of rational thinking. Yet, they managed to forge a few rules. One of them was the 200-day moving average.  Why 200-day and not 252-day that better corresponds to a year’s worth of trading days? Or better, why 200 days and not 201 days?

These questions need to stay unanswered. I have a new average I propose they start looking at: the 800-day moving average shown in the S&P 500 chart along with the old but “robust” 200-day:

It may be seen that the 2001 and 2016 corrections found support at the 800-day moving average; the 200-day was ignored completely.

Now, if the S&P 500 drops to find support at the 800-day moving average that will amount to a “real” correction of about 20% and fuel speculation about a possible longer-term bear market. Is this possible?

Obviously I have no idea of what will happen down the road. Last Thursday the S&P 500 became most oversold since 2011 according to our OB/OS indicator. But keep in mind that these indicators are of very short-term nature. There are no indicators to forecast medium-term action with high significance although it seems that many think otherwise in social media, especially those that like to draw lines on charts.

This market should show it has what it takes to generate a “healthy correction” (another silly financial media phrase) by dropping towards the 800-day moving average. A lot of excesses will be shaken out and a reset may occur from that level.

However, this market has not shown respect for the past on several occasions. It may reverse to the upside and rally to new all-time highs. Although at this point this is a lower probability scenario, it is still a valid one.

But after all we may need some new self-fulfilling prophecies.

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