Stock market weakness was long overdue

Stocks have retreated lately, with the S&P 500 falling below its 50-day moving average for the first time in over four months. Is this indicative of further weakness?

Usually, no. Since 1990, there have been nine occasions where the index fell below its 50-day average for the first time in over four months. A month later, notes the Carson Group’s Ryan Detrick, it’s been higher eight times. A year later, stocks gained on all but one occasion, bagging above-average returns of 14.1 per cent.

Recent weakness isn’t surprising. Historically, notes Bespoke Investment, August has “usually been the lousiest” in the years when the S&P 500 was up at least 10 per cent through the end of July.

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Detrick makes the same point. Weeks ago, he cautioned that things were looking “dicey”, with bears turning bullish just as stocks were entering a seasonally weak period (not only can August be tricky, September has historically been stocks’ worst month).

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A nervy period is arguably overdue, given the absence of any sort of pullback since February. Overall, recent weakness is perfectly normal, says Detrick, and likely to be a mere “pause before an end-of-year run”.