MW When U.S. stocks perform like they did earlier this week, they usually keep going up. So why are they still struggling?
By Joseph Adinolfi and Isabel Wang
The S&P 500 briefly broke above its 200-day moving average earlier this week. But its quick retreat back below that key threshold could portend more pain ahead.
The S&P 500 briefly broke above its 200-day moving average earlier this week. But the good times just couldn't last .
Investors breathed a sigh of relief as the index finally broke back above the key technical threshold on Monday. It had spent about two weeks below the 200-day after breaking below it for the first time in more than a year earlier this month.
Unfortunately, the sense of relief proved short-lived. By the time the market closed on Wednesday, the index had dived back below the 200-day, complicating the discussion about where stocks might be headed next.
Historically, the S&P 500 SPX has continued to rise after retaking its 200-day moving average. Dow Jones Market Data shows the index has, on average, delivered gains over the following three months, six months and 12 months.
But as of Wednesday, many investors still see more red flags than green lights in the stock market. Case in point: The S&P 500 finished below its 200-day moving average after falling more than 1% during the session as stocks were buffeted by the latest headlines regarding President Donald Trump's tariff plans, and another unflattering analyst note that raised more questions about the artificial-intelligence trade.
The drop caused the index to snap a three-day winning streak. It could also bode ill for stocks' near-term performance, if the past is any guide.
An 'unsuccessful' break
An analysis by Dow Jones Market Data shows that when the S&P 500 has mounted an "unsuccessful" breach of its 200-day moving average - meaning the index failed to close above that level for the next 10 consecutive trading days - more weakness has tended to follow.
Since 2018, the index has tumbled, on average, by 6.7% over the next month following an "unsuccessful" breach of the moving average. In contrast, following a "successful" breach, the index has gained 3% over the next month, on average.
Signs of weakness have persisted beneath the surface of the index as well. A team of analysts at Bespoke Investment Group said a "relatively even split" between the number of S&P 500 sectors trading above and below their respective 200-day moving averages suggested the latest stock-market bounce was seeing some pretty weak follow-through.
See: The 'misery index' is creeping higher. Does that spell doom for stocks?
Defensive stocks are still in the lead
Another worrying sign: Defensive areas of the market, like consumer-staples stocks, have continued to outperform.
This suggests that, although investors have started to nibble at the U.S. market again over the past week, they have remained, generally speaking, risk-averse, according to Melissa Brown, managing director of Investor Decision Research at SimCorp.
Accordingly, SimCorp's risk-appetite models remain squarely in bearish territory.
"One of the things we take away from these market-sentiment numbers is that when investors are very risk-averse, they tend to react very badly to bad news and ignore good news," Brown told MarketWatch during an interview.
In addition to consumer staples, other defensive corners of the market, including shares offering high dividends and those that are less volatile than the S&P 500 index as a whole, have continued to outperform. While they saw a modest bounce earlier in the week, shares of the "Magnificent Seven" tech companies have remained mired in the red so far in 2025.
See: Why the stock market could be setting up to rally in the first half of April
Investors brace for economic 'air pocket'
Investors also face persistent worries that the U.S. economy might be facing an "air pocket," said Travis Prentice, chief investment officer and a portfolio manager at the Informed Momentum Co.
Ongoing weakness in the consumer-discretionary sector is the most obvious tell, Prentice said. Many of those consumer-discretionary names are more economically sensitive than their defensive peers.
Prentice also pointed toward popular moving averages, like the 50-day moving average, which has started to move lower. While the 200-day average has yet to experience such a shift, it has started to flatten out, a trend that Prentice said should be a concern for investors.
"We're kind of in no man's land right now," he said. "We're still trying to figure out if this is a correction, or something broader."
Uncertainty surrounding Trump's tariff plans has likely contributed to the stock market's recent troubles. But beyond that, signs of waning consumer confidence in the economy have left investors wondering if this might translate into weakness in some of the "hard" economic data. Investors will be keeping a close eye on GDP growth figures for the first quarter, which are due to be released late next month.
The latest reading from the Atlanta Fed's GDP Nowcast showed that the U.S. economy was currently on track to shrink by 1.8% during the first quarter.
Whatever happens next for the market, the economic data will certainly be a key determining factor, SimCorp's Brown said. In addition to growth, investors are still worried about inflation, which has persisted above the Federal Reserve's 2% target.
Pain for U.S. stocks wasn't limited to the S&P 500 on Wednesday. The Nasdaq Composite COMP fell by more than 372 points, or 2%, to 17,899.01, Dow Jones data showed. Meanwhile, the Dow Jones Industrial Average DJIA shed more than 132 points, or 0.3%, to finish at 42,454.79.
Small-cap stocks also continued to struggle, with the Russell 2000 RUT down 21.88 points, or 1%, at 2,073.60.
Ken Jimenez contributed reporting
-Joseph Adinolfi -Isabel Wang
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
March 27, 2025 06:30 ET (10:30 GMT)
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