January 6th, 2009

March to the 180-day Moving Average – Slowly

If you’re like me, you’re drooling at the percentage moves off the November bottom. The statistics are astounding. Since November 20, the S&P has increased 23.84% to yesterday’s close. Wow! An even bigger wow is that more than 60% (303 to be exact) of the 500 stocks increased more than the Index.

When you look at stocks having a price of $4 or less, the increases have been even more impressive with 62.3% outperforming the S&P 500 Index (see the strategy outlined in Those ‘Perpetual, In-the-Money Call Options’ of November 15).

So the obvious question is whether we’ve missed the boat. Should we jump in now with both feet with that preserved capital and try to catch the bounce off the bottom? With the 180-day (or more conventionally, the 200-day moving average) after today’s close at 1160.87 vs. the Index at 927.45 – why the gap today represents a further 25% move for the Index before it crosses above the moving average and issues an “all-clear”. Can you see all the gains left on the table?

Let me try to put your mind at ease:

  • Over the next several months, the MA will continue to edge down – slowly but it will come down. The amount it comes down depends on what happens to the market in the next several months. If the Index increases at the rate of 8%/month, for example, the Index will cross above the 180-day at 1079 by February 12 and an “all-clear” will be issued. If the market hits some bumps along the way and increases at half the rate (an average 4%/month) then the cross over will be on March 11 at 1041.
  • In all likelihood, neither of the above two situations will actually happen. Take a look at the following chart. Recognize it?
    It’s the bottom that was formed in 2003. Note that the Index temporarily crossed the 60-day in August and then retreated back in October to test the previous low of July. In November-Decmber the market crossed back over the 60- and 90-day moving averages; in January, it nudged the 180-day only to fall back again to almost test for the third time the bottom. It wasn’t until March and April that the 180-day was crossed followed closely by the 300-day and the bottom was finally confirmed and a new Bull Market began.
  • Why go into so much detailed history. It’s to give a frame of reference to the current attempt to form a bottom.
    On comparing this chart with the one above it becomes obvious that we’re in the earliest stage of this bottoming process. In all likelihood, there will be a retest of the November low and it may or may not hold. What can be said, however, with some confidence is that the Index will not rocket through the remaining moving average benchmark hurdles without some retracements and retesting. As Cater Worth said this evening on CNBC, this bottom will be similar to the saucer bottoms of 2003 and 1974, not the V-shaped bottom of 1987.

It has been hard watching all those missed profit opportunities slip by. The only consolation, we hope, is that there will be other opportunities to climb on. Furthermore, if our best guesses turn out to be nothing more than wishful thinking and the market resumes last year’s Bear Market and declines to new lows in 2009 then the majority of our capital will still be preserved.

Subscribe below or click here to learn more about help for navigating turbulent markets.