The Dow closed below its 200-day moving average this week for the first time in two years.
That ended the longest streak above the 200-day moving average since 1987. At 501 trading days, it was the seventh longest run in history.
Data Source for all charts/tables herein: Bloomberg, YCharts, Stockcharts.com. Note: all data in this post is price data, not total return.
How common is a close below the 200-day moving average and what has it meant for the Dow historically? Let’s take a look…
So what we find is higher volatility, lower average returns, and a higher probability of tail riskbelow the 200-day moving average. Over the past five years, we haven’t seen much of this as the Dow has traded above its 200-day moving average 90% of the time (vs. 65% historically).
This has been a boon for leveraged strategies as low volatility environments are the most conducive to using leverage (click here for our research paper on this). The 3X Leveraged Dow ETF (UDOW) was up 350% in the past five years versus a return of 86% for the unleveraged Dow ETF (DIA).
Are the next five years likely to yield a similar result? Anything is possible but a continuation of such benign conditions seems unlikely.
On that point, the volatility environment already seems to be changing. In 2017, only 5% of days had an intraday range (high to low as a %) greater than 1%, a record low. In 2018 thus far, 56% of days have exceeded the 1% threshold, the highest since 2011.
