For the First Time Since March, the S&P 500 Breaks Below a Key Level

The S&P 500 index wrapped up a bustling week for U.S. markets with a significant development on Friday, as it dipped below its 200-day moving average for the first time in over half a year. Additionally, it wiped out all the gains it had made during a summer surge that had its peak in late July.

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On Friday, the S&P 500, represented as SPX, experienced a drop of 53.84 points, equivalent to a 1.26% decrease, closing the week at 4,224.16. This marked the fourth consecutive day of decline, resulting in the index's lowest closing level since June 1. Most notably, it was the first time since March 17 that the S&P 500 closed below its 200-day moving average, which was positioned at 4,233.17.

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Over the course of the week, the S&P 500 endured a 2.4% drop, making it the worst week in a month. In the past seven weeks, the index has closed lower in five of them. While the S&P 500 has fallen by 6.8% from its closing high on July 31, it remains up by 10% year to date, according to FactSet data.

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Typically, a breach below the moving average is perceived as a bearish signal. However, some technical analysts believe that other indicators suggest that the S&P 500 has entered oversold territory, potentially paving the way for a fresh upturn, possibly commencing as soon as next week.

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Craig Johnson, the chief market technician at Piper Sandler, expressed his viewpoint in a phone interview with MarketWatch, stating, “From my perspective, this market has gotten to be pretty oversold.”

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Piper Sandler maintains a proprietary database that includes all U.S.-traded stocks with a market capitalization greater than $25 million and a share price exceeding $2. The data revealed that merely 18% of the stocks were trading above a 40-week moving average, a level reached only ten times since 1987, according to Johnson. When a substantial number of stocks are trading at considerably lower levels in comparison to their recent performance, it often signifies that a turnaround may be imminent.

Johnson further emphasized the rarity of such low readings, emphasizing the exceptional nature of the current market conditions.

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FactSet data revealed that over 65% of S&P 500 stocks concluded Friday below their 200-day moving average, marking the highest reading in a year. This corresponds with the notion of a "washout" for stocks, a perspective that Johnson and others have put forth.

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For context, in March, when the index last closed below its 200-day moving average, it remained below it for only six sessions. Dow Jones data shows that the S&P 500 was below its 200-day moving average for five consecutive days, spanning from March 9 to March 15, followed by a single day of closing below the average on March 17.

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