Investment managers regard the 200-day moving average price of an index such as the S&P 500 or of an individual stock as the dividing line. An index or stock trading above the 200-day average is being bought and is in an upward trend. An index or stock trading below the 200-day average is being sold and is in a downward trend.
The moving average smoothes out short-term price fluctuations and provides a high-level look that makes sense of the market. For money managers attuned to managing risk, a close below the 200-day moving average marks a change in trend, from a bull market to a bear market.
The market moved prices below the 200-day moving average on Tuesday, Aug. 2, indicating the start of a bear market.
In response, we recommend that portfolios remain diversified, with higher-than-normal money market balances, fixed-income holdings and low-correlated assets. This will protect investors from experiencing the full brunt of the stock market sell-off. While buying opportunities are likely to present themselves, they should be considered cautiously and with discipline.
