March 28th, 2008

Base or Top, Momentum Always Looks The Same

An irony of life is that “as you become older, the less time you have to have to enjoy the more patience you have“. That’s never been as clear to me than since last summer as I try to deal with this market.

In my youth, as I was first got hooked on stocks, I’d wake up early to throw open the morning newspaper to the stock pages and checked on how the stock I recently bought did the previous day. Many of you can’t relate to that because of our ready access today to the instantaneous data that’s literally a mouse click away.

Without momentum, there’s no directional movement in the market. Yet, as I’ve become older, I now see how long it actually takes for investor psychology to turn market momentum around. And only now, with less time to wait this turn around, I now see how little there is to do but be patient and wait it out.

For a some what different take on the need for patience, compare the following two charts:


The chart above is the S&P 500 Index since July 2006. Today’s Index is at approximately the same level as it was 17 months ago! So when talking heads flash their “Breaking Headlines” logo at each Fed Rate announcement or at each Unemployment or CPI report or the latest bank bailout, as far as your individual investment strategy is concerned consider it merely as a time filler. There’s nothing you need do or response to make. Market momentum continues to push the Index in the same direction.

Now look at the following chart:

I’ve inserted two spans on the above chart: the 11 months before the neckline was broken and a 17 month span comparable to the first chart. Again, a reversal of momentum and direction extended over months, not days or weeks.

But I tried to trick you. This second graph isn’t a top; it’s actually the 2002-03 base flipped upside-down. The tech bubble crash ended on the left side of the chart with a precipitous decline (displayed as a rocket blowup in the flipped chart) in July 2002. Yet it took nearly 11 months for the Index to again start moving up ( down on the right side of the flipped chart above) with sufficient certainty and conviction to change investment strategy (to buy or sell).

The most important indication of the change in both of these charts is the ranking of the four moving averages (60-, 90-, 180- and 300-day) and the position of the Index itself relative to them. Whether topping out or forming a base, it takes a lot of time and significant movement for a tradable trend to materialize and, when it does, the relative positions are similar.

No matter what anyone says (especially the bald-headed buy on CNBC in the evenings with the initials, Jim Cramer), the market is far from basing and it’s still too risky to commit your money.

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