Do we have a historic opportunity in the stock market?
The US stock market index S&P 500 experienced a historic milestone yesterday when it reached 4,820 points at 1:05 AM. With this, the US stock market fell by 20.9%, entered bear market territory (a drawdown of over 20%), and met the 2021 peak of 4,818 points.
This drop of about 20% also triggered a rather automatic technical pullback, as happened in 2022 and 2018. However, this drop also signaled something much more important: reaching the 200-week moving average.
The drop to the 200-week moving average (4,680 points) was in the vast majority of cases a historic bottom. This was also the bottom in 2022, 2018, 2016, and in fact in almost all cases, except for global crises like the 2020 coronavirus, this average was the bottom from which the market soared by tens of percent.
In the last 40 years, the 200-week moving average was not the bottom in only 3 cases:
- The dot-com crisis of 2000.
- The subprime crisis of 2008.
- The 2020 coronavirus crisis.
And yes, even in the terrible 1987 crisis, where the stock market crashed by 20% in one day on Black Monday, its support was the 200-week average, from which the market returned to its peak and rose to a new high of 360 points,
meaning a 70% return in two years from reaching that bottom.
This also happened in 1990 when the 200-week moving average served as the bottom, again.
The history and statistics of the 200-week moving average in the S&P 500 index prove an important saying:
"Be fearful when others are greedy and greedy when others are fearful."
The same saying coined by Warren Buffett, one of the greatest investors of all time.
Reaching the 200-week moving average is often accompanied by sharp declines and panic in the markets (as shown by the VIX fear index).
Statistically, this indicates that being greedy precisely during this period will likely yield excess returns.
Sincerely, Idan Siman Tov - Senior Investment Manager.