February 8th, 2012
Many decry the lack of volume, conviction on the part of most individual investors, the lack of excitement about a market that just doesn’t seem to want to turn lower but instead inexorably continues to move higher. Beneath the surface and behind the scenes, however, something is happening. Many aren’t aware of it because of their focus always on today’s “Breaking News”, earnings reports or press releases. What most don’t see is the change that’s taking place in the form of a slow turnaround in the trend of market momentum as measured by the moving averages.
In a piece entitled “Sweet Dreams” way back on October 14, 2010, I wrote:
…… have you taken a look recently at how the four moving averages (50- ,100- ,200- and 300-day) are converging as they were all trying to squeeze through the neck of a bottle? (click on image to enlarge)
First, it’s important to note that sometime next week, the dreaded “Death Cross” of the 50-dma crossing under the 200-dma that we were so fearful of at the beginning of July will be reversed and, by definition, will become the “Golden Cross”.
Also note that the four moving averages are transforming themselves into a bullish alignment so long as the Index itself remains above them all for the next month or so. That’s pretty monumental because it is a solid confirmation that a bull market is in place.
A few days before I’d written this piece, Europe’s Finance Ministers approved a rescue package worth €750 billion aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility (EFSF); six months later (May 2011), our stock market was 16% higher.
But the situation in Europe appeared to continue deteriorating. It became evident then that due to its severe economic crisis, Greece’s tax revenues were lower than expected making it even harder for it to meet its fiscal goals. Following the findings of a bilateral EU-IMF audit in June, further austerity measures were called for while Standard and Poor’s downgraded Greece’s sovereign debt rating to CCC, the lowest in the world. Simultaneously, our stock market seemed to hit a wall; it cratered in August 2011.
The market now seems to be again trying to squeeze through the neck of that same bottle. Last week, the Black Cross again turned back to Gold and all four moving averages finally turned up this week. Within a month or six weeks, the four moving averages will right themselves and we’ll see them in a perfect bullish alignment again. Note the similarity between the 2010 above and what it looks like today:
I wrote to my members at the end of January that
“Going back 50 years, there haven’t been many periods when this convergence [of moving averages] has existed outside of market turns and that’s why I believe the market will soon begin trending higher. Obviously my anticipation isn’t based on an astute distillation and analysis of domestic or international economic and financial data. This prognosis is based on my read of the history of market psychology and behavior.”
The convergence continues to unfold. Psychology is changing to match the more positive economic news. We have begun adding to our positions with focus on select Industry Groups. If there won’t be another surprise to hit us from left field (not intended as a reference to the elections this November) then we should continue putting cash to work as momentum begins really accelerating.