April 18th, 2008
It feels like this time might be different, this time the market might just break back above the 90-day moving average and through the upper resistance trendline of the channel it’s been ricochetting in since the beginning of the year. Take a look at the chart:
Some may say the market has clearly demonstrated upside momentum but my back tested indicator says substantial risk of a downward reversal is still present. The market will not have proven itself, and that risk will not have dissipated until the index crosses over the 180-day moving average.
Markets with similar alignments of index and moving averages, where the index cross the back above the 90-day moving average, are markets with a high risk of “recidivism”. In the 68 times this has happened since 1964, the index has reversed and fell back below the 90-day moving average 62% of the time. Let me state the obvious …. those are less than 50/50 odds of winning!
Of course it depends on the news, the economy, the financial markets, the international situation, the political situation. I’m not smart enough to predict each of these, to assess today their influence on the market tomorrow, to add them all up and, based on that subjective fundamental analysis, tell you whether the market has turned positive or not.
We won’t really know or have an explanation of why it happened … once the index has crossed over the 180-day average …. until after it does and all the pundits then tell us why.
The market is still very narrow, albeit widening out nearly every day. My gauges are the New High list and the 4-Year New High List (my own filter). Over the past several weeks, there have been less than 100 stocks that were making new highs on either list and most of them were either energy, basic materials, fertilizer or precious metals stocks. Today, several interesting new names were added to the list: Netflix, IBM, Orbital Sciences, Darling (although that’s technically an alternative energy stock), Crown Holdings, Buckle and Capestone Turbine (also, technically in alternative energy). The number of New Highs on my lists were 137 (52-week) and 98 (4-year).
If you must own stocks then these are the ones you want to own, they’re the stocks that have generated their own internal momentum. As more stocks from a wider range of industry groups move on to these lists, they will contribute their own momentum into general market momentum; that’s how the index will move above the 90-day average.
It’s been a long dry spell for traders (on the long side) but when the tide does finally turn, we’ll be ready.