The 50-day moving average, along with the S&P 500 index, is widely followed by professional investors and money managers alike. As I write this post, the benchmark index is trading @ 2181.99 and the indicator for the “percentage of its underlying components” trading above their 50-day moving average is at 55% (with a declining slope). For the bulls amongst readers, I am well aware that from the perspective of its 52-week relative strength, the market is just barely inches from its all-time high @ 2193.81 and displaying remarkable resiliency.
However, my advice is to be somewhat cautious and here’s why:
- With only 45% of stocks holding support at this key level, it means that a smaller number are doing a disproportionate amount of the heavy lifting. Remember folks, the index is weighted according to market capitalization.
- Of those stocks trading above their 50-day moving average, 44%, or roughly half, are 2.5% or less from violating this key support level.
- 58% of them are 3.5% or less from their 50-day moving average support line.
Thus far, the correction has been orderly, but if some of the bigger names start to break down, chaotic selling could ensue. For example, here are nine stocks in which a price correction could trigger a tipping point in the market.
- Facebook (FB)
- Microsoft (MSFT)
- Berkshire Hathaway (BRK.B)
- Apple (AAPL)
- Amgen (AMGN)
- Proctor & Gamble (PG)
- Chevron (CVX)
- Altria (MO)
- 3M (MMM)
The technical trends and underlying fundamentals for all of the above stocks are bullish. Yet each of them, with exception to FB, trades relatively close to their 50-day moving average and could easily get taken out on one or two bad-hair days in the market. Perception counts for something on Wall Street and confidence sells. Of course there are a number of blue chips within the index above their 50-day moving average, but none command the market cap and cache of these mega-caps.