Moving Averages and Volatility

The Dow closed below its 200-day moving average this week for the first time in two years.

Image of Dow Jones Industrial Average since June 2016

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.

Longest streaks of Dow Jones Industrial Average from 1896 to 2018

Data Source for all charts/tables herein: Bloomberg, YCharts, 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…

  • Since 1896, the Dow has closed below its 200-day moving average 35% of the time.

Dow annualized price return from 1896 to 2018 image

  • The annualized return of the Dow after closing below its 200-day is -3.2% versus +9.7% for closes above it.

Dow annualized price return graph from 1896 to 2018

  • The annualized volatility of the Dow after a close below its 200-day moving average is 22.4% versus 13.6% above it.

Image of Dow forward annualized volatility from 1896 to 2018

  • In the worst 100 days in history (declines greater than 4.6%), the Dow was trading below its 200-day in advance 72% of of the time.

Worst 100 days graph of Dow

So what we find is higher volatility, lower average returns, and a higher probability of tail risk below 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).

Total returns of Dow Jones Industrial Average

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.

Dow intraday range image from 1930to 2018

Are the halcyon days in markets behind us? I don’t know, but with each passing day it’s become more clear that 2017 was indeed the best of times.


Related Posts:

Leverage for the Long Run

Leveraged ETF Myths

2017: The Year in Charts

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Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Charlie is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Charlie holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and also holds the Certified Public Accountant (CPA) certificate.

In 2017, Charlie was named the StockTwits Person of the Year. He has been named by Business Insider and MarketWatch as one of the top people to follow on Twitter and his work has been featured in Barron’s, Bloomberg, and the Wall Street Journal.

You can follow Charlie on twitter here.


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