Using The 200-Day Moving Average As A Technical Indicator?
I’m sure you’ve seen the headlines recently. It’s uglier than a squished bug on your windshield. Just look at a few…
Six Year Lows on the Dow!
Stock Downturn Continues
Market Hits New Crisis Low
Dow Plummets!
Wave of Selling Spans the Globe.
The headlines are brutal. It’s a sickening reminder of how much money we’ve lost in the market. Right now, those losses are being measured in the trillions.
If you’re like other investors, you’re afraid to open your retirement account statements. The losses are horrific. Some people are down 10% or 20% since the beginning of the year (and it’s only February). I heard a great quote the other day and it applies to the current state of fear we’re living in.
General George S. Patton, Jr. – “If everybody’s thinking alike, then somebody isn’t thinking.”
This is the perfect contrarian quote.
It starts many people thinking now might be the time to get back in. After all, how much worse can it get? Some investors see this market dip as the buying opportunity of a lifetime. My thought is simple… ever see a watermelon run over by a big truck?
It can, and probably will, get worse.
I have a famous market saying for those of you looking to jump back in (in a big way) at these lows. “Don’t try to catch a falling knife.”
So, you’re probably wondering why I’m so confident. It’s simple. I’m waiting for the market to tell me when to get back in. I look at the 200- day moving average on the major indexes.
I know it sounds simple… but sometimes the simplest answer is the best one.
Look, back in January 2008 we noticed something interesting. The 200-day moving average crossed below the market and started trending downward. At the time the S&P 500 was trading around 1,340. We warned everyone to get out and hedge their portfolio. What happened?
Now the S&P 500 is trading around 760. That’s a lot of pain you could have avoided by simply looking at this one indicator.
Why were we so confident?
Because we’d seen it before. This wasn’t a one-time event. Go back and look at the ‘Dot-Com-Bomb’ from 2000 and 2001. You’ll notice the 200-day moving average started trending lower then too.
Here’s the cool thing.
This same indicator is good at getting us out of the markets. It’s also good at showing us when to get back in. Just look back at early 2003. The market had been trending lower for almost 3 years. Then in April and May the 200-day moving average started trending up again.
Clearly this technical indicator is a good way of looking at the market. The question is “What’s it telling us now?” The answer is surprising. It tells us nothing.
Seriously.
The 200-day moving average is still trending downward. This tells me to hold off. It’s not yet time to jump back into the markets. This is not the time to buy & hold… not yet. Believe me, I’m watching this indicator closely.
Once we start trending higher, it’ll be time to get reinvested in the markets – in a big way. Until then, continue hedging your positions… buy stocks very selectively, and stick to the strength of the markets. If you do decide to take positions, make them small… it’s a traders market right now.
Category: Technical Analysis
