April 24th, 2008

Why S&P 500 1430 is So Important

It’s looking better and better all the time. I know I last wrote that we need to be aware of the risk of a “sucker’s rally” but today’s action so far challenges one’s willpower and tempts you to edge from caution to bullish by buying some stocks moving into their own new high territory.

I’ve been writing about a channel that’s been in place since early January and, as of today, the S&P 500 may have crossed through upper boundary resistance level. I say “may have” because today’s action was associated with rather lackluster volume; more action would have added some comfort. Regardless, the market is about to challenge the downward-sloping 180- and 300-day moving averages as it’s hovering at around 1295 as I write, a mere 2.53% under that hurdle.

This is soooo important (and I can’t emphasize it enough) because stocks just aren’t going to move if the whole market isn’t moving. You can buy what you think are pretty good stocks in favored industry groups but if the market isn’t moving ahead with bullish momentum the odds are high those stocks will languish also (conversely, buy mediocre stocks and the odds are you’ll probably make some money on them too).

I’ve been searching around for the source, the authority for this phenomena and I finally found it. It dates back to 1964-1966 with a Professor Benjamin F. King wrote two articles in the Univ. of Chicago Journal of Business. He wrote:

“50% of a stock’s price movement can be attributed to the overall movement in the market, 30% to the movement in its sector and only 20% on its own.” from “The Latent Statistical Structure of Securities Price Changes”

and

“Of a stock’s move, 31% can be attributed to the general stock market, 12% to the industry influence, and 37% to the influence of other groupings, and the remaining 20% is peculiar to the one stock.” Benjamin F. King (Market and Industry Factors in Stock Price Behaviour, Journal of Business, January 1966)

That’s why much of what I’ve been writing about since the beginning of the year is my MTI, Market Timing Indicator. The Indicator is based on the alignment of the Index itself and 4 moving averages; I tested back to 1964 to determine which alignments were positive to stock ownership and which were negative.

If the Index crosses over the 180-day moving average, it will be the first time since December 27 where the opportunities in stock ownership outweigh the risks.

It’s been a long dry spell for profits (unless you were on the short side of the market). And perhaps I’m jumping the gun. But it would be fun seeing some green numbers on my screen again. The day will come but not on a regular basis unless and until the market crosses through the 1430 mark.

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