The Stock Market Bull is Back, Not!

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6/4/09

Even though the stock market has rocketed skyward since the March lows we remain in a ‘Bear’ Market. You may be wondering how I can be so certain. After all, hasn’t the market risen 35% or so since the March lows? The answer is yes it has. But some of the key indicators have not yet turned up enough to signal the resumption of a new ‘Bull’.

One of the important indicators I use to help manage risk is called the 200 day moving average. I’ve analyzed it back to the early 1970’s and it has demonstrated a high degree of reliability in signaling the beginning and end of both Bull and Bear markets. Not infallible, but reliable. 

The 200 day moving average line turned down in early 2008, the beginning stages of the current Bear, and it has not yet turned up. Simply put when the 200 day moving average turns down it has in the past reliably signaled the onset of a Bear Market. Conversely the 200 day moving average turning up has usually signaled the beginning of a new Bull market.

If you check the dates 1/1/00 through 12/31/03 you will see the same indicator moving down in early 2000, a clear signal of the Bear market that marked the end of the ‘dot.com’ era and carried the major market indices down 45% or more.

Does this mean we all have to become short term traders? Absolutely not! Note the two periods of time indicated above culminated in only three transactions based on market trends. The first, a sell, took place in late 2000. The second, a buy, was in early 2003. That means a prudent investor remained out of the stock market for approximately 2 ½ years, a period when the market crashed about 45%.

The buy transaction in early 2003 held until early 2008, when the 200 day moving average began moving down once again. And we all know what has transpired over the last year or more. This has been and continues to be one of the worst stock market crashes and recessions in our lifetimes.

There are a number of additional indicators I use to guide me. Based on these signals I purchased bond ETF’s early this year and in March bought a 10% position in SPY, a S&P 500 index ETF. As other indicators flash green I will continue to buy, likely small company and emerging market ETF’s. But I will not be fully invested in the stock market until the 200 day moving average begins to head north again.

The reason for the preceding explanation is to stress the idea of a money management system that will help you make decisions concerning your portfolio. A system based on logic, not guesswork or emotion. With a system in place you are able to make decisions based on a systematic action plan, well thought out in advance. Financial decisions guided by intuition and emotion rarely turn out well.

In the world of market risk investments we must have a system that includes having an entry and exit strategy. We must have a clearly defined method of deciding when we are buyers, and when we are sellers. Note I said nothing about holders, meaning “buy and hold.” Two serious Bear markets in the last eight years should have removed that term from the minds of any investor who desires to remain financially solvent.

So the takeaway here is the 200 day moving average can be a valuable tool in helping you make decisions based on facts, rather than emotion, second guessing, or relying on the prognostications of the ‘gurus’ out there in ‘Finance Land’.

 

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