June 18th, 2009

False Starts? What False Starts?

Couldn’t pass this up, a 1933 propaganda film made just after Roosevelt took office. Apparently, one of the many acts he rammed through that Congress in his “first-100-days” was an inflation bill aimed at jump-starting inflation. Turning deflation into inflation by abandoning the gold standard would create jobs, income and the return to a sound economy (or so the film says).

Although different language is used and the programs use different acronyms (then NRA, today TARP and TALF), it all creates inflation. A major difference, however, is that back in the 1930’s we still manufactured and farmed. Today, most of what we buy is made elsewhere, even much of the food we eat comes from overseas suppliers or corporate farms here, not independent farmers. Not sure what it has to do with today’s stock market but it was fun (and somewhat frightening) to watch.

Changing direction, a reader yesterday asked “Just wondering if it’s common to have ‘false starts’? A cross above the 200 DMA happened in May 2008 only to fall back and in retrospect would have been a great selling opportunity.”

I went back to the MTI data and found that in each of the bear market (an extended period over which the MTI signalled “all-cash” and the alignment of index and its moving averages were the most bearish), the MTI often flip-flopped for three to four weeks before the “all-clear” was existed for more than 3 months. The percentage changes in each of those flips and flops were never significant.

Take, for example, the Tech Bubble Crash of 2003 (click on table to enlarge):

Both the 200-day MA indicator and the MTI gave some false signals before and after the exact bottom but after April 16, 2003, both indicated full steam ahead. The 1970, 1974 and 1982 Bear Market bottoms were much cleaner with nearly a single day reversal of the signals (although not exactly the same day).

You might ask if the two indicators are so close at the turns how and when is the MTI different from the 200-day moving average indicator. The answer is they may give different signals after either a bull or bear market is well under way. A perfect example was 1998, right around the retreat due to the Asian and Russian Financial Crises.

Perhaps the best way of explaining the difference is that the 200-day MA indicator is sort of like a meat cleaver while the MTI is more like a scalpel. Here are the day-by-day details (200-day is left colored column; click on table to enlarge):

Which is better; which is more precise? It’s hard to say. Neither predicted the 18% Asian Crises declines and both suggested caution due to undertainty as to how the full extent of the Crises impact. But both are intended to help investors avert irreparable damage. Both indicated that investors should be cautios but, when it became clear that invesotors were ignoring the Crises (as they did Greenspan’s Irrational Exuberance speech in 1996) continuing to bid up stocks, they gave an all-clear green light throughout the remaining 35-40% of the Tech Bubble’s growth until it popped in 2000.

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