In 2019, the S&P 500 (NYSEARCA:SPY) witnessed the worst decline in the last decade. Many investors compare the current bearish sentiments to the subprime crisis in 2008. During that period, the SPY corrected around 50% from its high.
Amid the current decline, the SPY Index lost around 35% from its record high. In March 2019, the yield spread or the US 10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant Maturity yield spread turned negative for the first time since the subprime crisis.
In the past 50 years, when the yield spread turned negative, a correction happened within 12 months. However, the current correction might be coincidental. The correction was triggered by the outbreak of COVID-19. Such a large scale pandemic only happens once in a century.
A reversal sign?
On a monthly average closing price basis, in April 2009, the S&P 500 closed higher sequentially. Before that, the S&P 500 was in a downturn for more than six months. After closing higher in April 2009, the market recovered.
In March, the S&P 500 closed at 2,652. In April, the figure was at 2761. A higher monthly closing could point to a recovery in the S&P 500.
On Tuesday, the CBOE Volatility Index declined by 7.5% to 28.2%. The CBOE Volatility Index and the S&P 500 Index are oppositely related. In March, when the S&P 500 broke below the 2,200 level, the CBOE Volatility Index rose to 82.7%. The CBOE Volatility Index was at the highest level since the subprime crisis.
On Tuesday, the SPY Index closed 2.5% below the 200-day moving average. The index was also 2% below the 100-day moving average at 2,981. If the S&P 500 closes above these long-term moving averages, the current recovery in SPY could sustain. Read Can the S&P 500 Cross 3,000 and Its 200-DMA Today? to learn more.
On Tuesday, the SPY Index was 3.6% and 9.3% above the 20-day and 50-day moving averages, respectively. The index above the short-term moving averages suggests a short-term rally.
Another important signal is that the 50-day moving average was just 0.7% below the 200-day moving average. If the 50-day moving average crosses over the 200-day moving average then it will be a “golden-cross” for the index. Based on technical analysis, usually when the short-term moving average moves above the long-term moving average asset prices rise. On May 22, 2019, the 50-day moving average moved above the 200-day moving average. In February 2020, the S&P 500 Index made a record high.