August 12th, 2008

Bottom Line: Another Suckers’ Rally in the Making

You may not know it but today is an anniversary of sorts. A five-month anniversary of when the four moving averages I use in my Market Timing Indicator (60-, 90-, 180- and 300-day) first aligned perfectly in reverse sequence. The last previous time that you would have seen that array was in March, 2003, the beginning of the last bull market or, more correctly, actually the bottom of Tech Bubble Market Crash.

Five months later and the Index is up a mere 2.51% – not even enough to cover the cost a subscription to your favorite stock market newsletter or the Wall Street Journal. But weak performance of the index during the intervening five months has pulled the moving averages down between 5.27% to 6.64%; the decline in the slower, lagging 300-day moving average was less.

And why is this 5-month anniversary important to mark. Because it underscores how little of substance has happened during these past five months to give us any hope that we’re anywhere near to being out of the woods – or in Wall Street parlance, “hit bottom, made a base”.

We’re also approaching another anniversary. Not a calendar anniversary but April Fool’s Day, when the Index jumped 3.59% and crossed above the 60-day moving average. Here’s what I wrote on April 3:

I confess, the market looks tempting. But it’s just at times like these that every investor needs a tool to help regulate their emotions. The biggest up-move since 1938 on the first day of trading in the second quarter, the index breaking above the 60-day moving average …. what else do you need to jump back in with both feet. This proves that the market has hit bottom and is now turning. Or does it? Well, no, not really!

I should point out that if the Index successfully also cross back above the 90-day moving average, my back testing indicates continuing an “all cash” position. The reason is because over the past 44 years, there have been enough cases when such recovery moves failed and the market either stalled or resumed it’s decline.

And that’s exactly what happened. The Index did cross over the 90-day on April 18 at 1370 and continued its spring rally to top out at 1440 one month later on May 19. From there is was all the way down to the last bottom of 1200 on July 15.

Why go into this history? Because you’re about to see a rerun. The Index is knocking on the door of again crossing over the 60-day moving average. Here’s the picture:

The market is once again entering that critical area requiring critical cross overs to occur before a turn can be called with a high degree of confidence. Some will jump on early but I will reserve my judgement in fear of this being another Suckers’ Rally like the one we had in April and May (see April 22). While the chart looks similar to April, the economic backdrop looks somewhat more vulnerable because of a host of reasons which we cover at another time.

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