March 6th, 2008
The Market Timing Indicator (MTI) that I’ve been writing about since the beginning of February is a measurer of momentum. It defines direction, longevity and strength in terms of several moving averages and the position of the S&P 500 index relative to its moving averages. I back tested the market over the past more than 40 years and, based on these facts isolated the alignment with the lowest risk of loss and those with the highest probability of safe investment conditions.
The markets declines over the past week present is surprise for anyone who’s been a reader here. The market’s been acting exactly as outlined in my February 15 post when I said there would be a significant drop (brashly, I called it a “crash”) within 10-20 trading days, between March 3-14. Without a stupendous upside move, my indicators said the 180-day would soon cross below the 300-day moving average and in market history over more than 40 years this has accompanied significant additional declines.
That cross over, which will probably take place either tomorrow or Monday has occurred 51 times since March 1963. However, in only 7 times has the upcoming alignment of Index and moving averages been preceded by it’s present 180-300-90-60-Index alignment. Those previous occurrences were:
Let me explain the above table. The index we are approaching is a reverse alignment of the 300-, 180-, 90-, 60-day moving averages with the S&P 500 Index below all four. The immediately preceding alignment are in italics. In those 6 of those previous occasions, market action over 60-90 days earlier were substantially under the current level so, as the moving average edged forward, the 90-day average went out of sequence and crossed over the 180-day average.
That’s a highly unlikely situation today because of the Index’s track since last summer. The only other occurrence is that the market will recover modestly causing the 60-day moving average to cross back over the 90-day. When that did happen in 1984, it occurred 12 days after entering this alignment. And what happened next?
That happened 5 times since 1963 and each time the Index declined further anywhere from 1.7% to 3.8% and lead back to the most pessimistic alignment of 300-, 180-, 90-, 60- and Index; those runs extended from 5-32 days with the following adverse past outcomes:
An analysis leads to the following observations: seven of 12 times the market declined further and the decline in 2001 was 8.74%.
The only way of getting out of this revolving door is for the Index to finally increase above the lowest, 60-day moving average. But it took an average 30-40 trading days.
Conclusion: given where the market is today and the speed by which it has declined to this level, history says there’s a high probability that market momentum will push the market down for another 40-60 trading days for a total additional decline of up to 10%.
But I’m not making a prediction only indicating what is highly likely based on the market’s history. Experts, analysts, personalities can’t tell you when it’s alright to buy again … only the market can send that signal through its own internals.