September 5th, 2008
“Investors should be buying when they’re most frightened” according to one of CNBC’s “talking heads” this morning. Can you believe that perverted logic? I don’t know about you but I’ve been frightened ever since just before this last New Years (up until then, I held out hope that the decline from the October highs would just be a correction) when I started liquidating (just as the talking head started buying the stock I was dumping?).
Had you been buying during each of the declines since the beginning of the year, you’d be facing a 15.77% loss through yesterday’s close. And it continues getting worse this morning. For me, what’s even more frightening than buying as the market declines is selling in the face of the barrage of “pick-up-stocks-at-these-cheap-prices” talk.
But what’s been happening over the past couple of weeks shouldn’t be surprising for you regular readers. What we’re seeing is the building of the right shoulder of the expanded head-and-shoulder top formation I wrote about most recently on July 16:
The chart above is as of 10:09 so it’s too early to tell how the day will end but this morning’s 6.1% unemployment rate news is acting as additional fuel to the fire that this economy is in trouble. (What happened to the strong world economies that was sucking up all available fuel, metals, steel, agricultural commodities and was going to support our export business?)
You can still enjoy a baseball, football, basketball game or watch a tennis match as a spectator without having to go out on the field and get knocked around and hurting yourself. Likewise, you can let the economics experts and market professionals fight it out while you sit safely in the stands observing the “action on the field”. Sure there are always upsets but wouldn’t it be easier betting on the outcome if you could when the game was in its final minutes? Let it be the same with the stock market.
How will know the right time to get back in the game? The answer lies in the moving averages. I’ve been reading about The “Golden Cross” and the US Dollar and Bespoke Investments’ Dollar Golden Cross. This doesn’t refer to some religious supplication but about the 200-day moving average crossing above the 50-day moving average. My MTI is a model using 4 moving averges.
I’ve back-tested it against 45 years of data and it reliably indicates when it’s better to be out of the market than in. As a general rule of thumb, it won’t be safe to get back in the market according to the MTI until the moving averages begin to reverse their alignment (in other words, the 60- and 90- day cross above the 180-day) and the Index itself crosses above the bottom two of the moving averages. Looking at the chart above, you’re going to have to be patient because it’ll be quite a while before that happens.