October 20th, 2009
Mark these dates on your calendar: November 17 and December 3. What’s happening? These dates could mark when the market clearly steps out of a “bottom recovery” and, after what I hope will be only a brief consolidation, into unqualified bull mode.
On what do I base this? On the fact that the last of the slower moving averages, the 200-day MA, will cross above the slowest moving average, the 300-day MA on November 17. At that moment, each of four moving averages will be perfectly aligned from slowest (at the bottom) to the fastest (at the top) with the Index above them all – a perfect bullish alignment.
And what happens on December 3? That’s when the 300-day MA could begin trending up for the first time since January 3, 2008, nearly two years ago. If it does, the last obstacle to declaring the recovery’s end will have been cleared.
The above assumes that the market continues growing at about the same rate as it has since Labor Day, or approximately 6% per month, or 0.3% per day. If that happens, the S&P 500 will hit 1198 the Monday after Thanksgiving and the 300-day moving average will hit a low point a few days later, turning up from that point forward.
Why is the 300-day moving average’s turning up so important? Moving averages are momentum indicators and incorporate the market’s action over the preceding 300 days. It takes a lot of effort to overcome the impact of over a year’s worth of lower closes and, once having achieved it, significant effort (a huge move down) would be required to reverse the momentum’s direction. As a matter of fact, since 1963 (the extent of my database), a turn in the 300-day moving average has usually been followed by an extended move (either in time, percentage or both) in the direction of the turn.
I consider the direction of the 300-day moving average to be a confirmation of another momentum indicator we heard much about this past June and July: the Index crossing above of its 200-day moving average. Granted, the Index has risen sharply since then (about 27%) but the move has consistently been susceptible to being called a Bear Trap rally. Once the moving averages are aligned and all have turned up, there can be little question that a Bull Market is in progress.
Some will claim that I flip-flop and inconsistent. How can I one week say that I’m pruning, trimming and expecting a correction within days and weeks of say that the market is likely growing into a bull market. I don’t feel being inconsistent at all. Consolidations happen all the time in bull markets and there’s no better place to have one than the market transitions from one stage to another.
As a confirmation of the market’s continued internal strength, here’s an update of the indicators you’ve seen here before (click on table to enlarge):
The number of new highs continues to increase (1-year highs now at 510, or 10% of all stocks) and the number of stocks with Bull Crosses (the alignment described above that the Index could achieve on November 17) has grown to 1002 or nearly 20%. Meanwhile, the number of rollovers (that’s stocks making new lows) is still less than 20 and stocks with Bear Crosses (the inverse of Bull Crosses) is 199, a mere 3.9%, and many are local and small regional banks.
The alignment of moving averages evidences that the correction could come soon (December to early 2010) and when a correction does arrive it might not be long nor deep. Again, no one can predict the future but, at least, that’s what our operating assumption will be until the market tells us otherwise. “Sell in May and go away” and the “September-October worst month” scares were hollow. Hopefully this perverse market doesn’t surprise us again by turning traditionally strong months into weak ones. We’ll just have to stay alert and nimble, reacting quickly to any surprises it may throw our way.