March 5th, 2008
I think investors, by virtue of the fact that they hope to profit from taking risks, essentially are optimists. If you were by nature a pessimist, you’d be in fixed income investments.
Consequently, whenever the market turns around, even if it’s a labored retracement and limited in breadth, you start hearing all about a bottom being put in and it was time to start picking up bargains.
But this is so, so shortsighted. Look back a month, back a quarter, back to last summer. The more than 2% reversal today doesn’t even make a dent in the market’s prevailing trend and downside momentum. You don’t turn a ship on a dime and neither can quickly turn around the attitudes and perspectives of million of investors, both individual and institutional.
That’s why I try to take the market’s temperature by using 4 measures: 60-, 90-, 180- and 300-day moving averages. My statistical analysis of the stock market’s history over the past 45 years is that a sustained bull market can only occur under certain circumstances. At other times, it will only represent a temporary reprieve from the bear.
In fact, as I pointed out on February 6,
“Over the past 44 years of market history, there have been 19 instances when the MTI [my Market Timing Indicator] read 17105 [where the market has been treading for the past 19 trading days] and in 15 of those the market finished its run down; it finished up at the end of only 4. The average decline during those runs was -2.62% with 6 being greater than -2.00% with the largest being -10.74% in 1966.”
And what happens from this point onward? There are only two directions and the one is only “inches” away from is when the four moving averages are in reverse sequence (300-, 180-, 90- and 60-day moving averages with the actual index below all four). On February 11, I wrote, that when this occurs, bear markets begin.
Here is how the two long-term moving averages are converging:
The Index itself is virtually at the same point it was on February 6, when the MTI morphed into its current configuration. Since then, the two long-term moving averages have converged and are on the cusp of having a cross-over.
And what happen when that cross-over has happened over the past nearly 45 years? More on the that shortly.