May 1st, 2009

Measuring Market’s Health: Moving Averages, Coppock Curve, Mean Reversion

The market has only two more hurdle to cross before that long-elusive “all-in” green light (see them all in the chart of the March 18 post, “8 Hurdles to Cross“). One of those hurdles, a trendline going back to the neckline of the 2002-2003 Tech Bubble Crash bottom, was taken out by the rapid descent of the 180-day MA which crossed-below it. We haven’t felt this much excitement in a long time and it feels sort of scary. Perhaps the whole thing is just an illusion and it will soon all go crashing back to the mid-700’s on the S&P.

However, I don’t think it will because so many stocks are now participating in this rally. Take, for example, the readings of the market’s pulse that I’ve been tracking since the beginning of this year, the number of stocks crossing above various moving average benchmarks:

These measures have never (since I’ve been tracking them) looked better. As of yesterday, over 70% of stocks were above their 90-day moving averages and 37% above their 180-day. The number of stocks having created “Golden Crosses”, in their moving averages an even more stringent benchmark, has increased more than five-fold since the market’s low just back on March 9 and equals that of the last Bear Market Rally last March (what I kept calling back then a “Suckers’ Rally”).

How are the other broad market gauges we follow doing:

  • Coppock Curve: I described the Coppock Curve on March 29 in “Another Constructive Indicator“. The indicator hasn’t turned positive yet, as I thought it might, but will do so in May if the S&P 500 closes May at or above 900.
  • Reversion to the Mean: A very long-term regression line of the monthly closing S&P 500 Index, bounded by upper and lower trendlines (one reader took exception to the fact that I started the chart in 1939, a Market low):

    I’m fascinated (and take comfort) by the fact that the Index barely crossed the lower boundary before it turned to cross back above, as it did in September, 1974. Since 1974 was my model for the current bottom, it’s constructive projecting from here the same path as the market took back in 1974-75 (that projection is indicated by the dashed line). If the current crash bottom follows close a path similar to the 1974-75 bottom, we can expect S&P 500 closing prices something like the following:

So while we’re holding our breath that all these signals ultimately follow through with a promise similar to past experience, it could also mean that we’re not going to see the all time highs of 1500+ for some time. If the market follows the track of the 1974-75 Bear Market, the highest we might see the market by Year-End 2009 is 1050-1075 and 1250-1275 by Year-End 2010. While that’s a respectable 20+% gain for next year, it’s not the sort of volatility we’ve grown accustomed to over past several months. But then again, who needs that level of volatility.

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