Monday, January 25, 2010

The Market's New Trend: Down?

Fear - have you returned?
The markets forgot 'bout you
Have we hell to pay?

NFL: Both Public Teams Cover

I'm a day late publishing the weekly update this week, partially thanks to the NFL conference championship games. I normally write on Sundays, but instead devoted yesterday to three great American pastimes - gambling, drinking beer, and watching football.

Of note to us speculators, the Colts and Vikings both received a slight edge in public betting percentage (usually a slight contrary indicator in sports betting) - and both teams covered their respective spreads. (The Vikings lost the game, but they were winners in my +3.5 book).


The Market's New Trend: Down?

Has the trend of the market (finally) changed from up to down? We got fooled in November, so I'm hesitant to call a downturn until we see a break of the 200-day moving average to the downside.

We're not there yet, but there are some signs that this could be a resumption of the bear market - a lot of people forgot that we are in a secular bear market - which is exactly what bear market rallies are supposed to do.

At risk of speaking for the rally, I believe it's accomplished everything it could have hoped to do back in March - it's rallied for almost a full year, retracing over 50% of previous losses, and has convinced many "experts" that the worst is behind us.

It'd be a perfect time for the S&P to start a violent drop below it's previous March lows.


Gotta Respect the Simple Moving Average

The red line below represents the 200-day Simple Moving Average of the S&P 500. As you can see, if you'd have simply been long stocks when they are trading above their 200-day moving average, you'd have been in good shape.

And conversely, you'd want to have been out of stocks, or even short, when they are trading below the 200-day SMA.

The S&P is still comfortably perched above it's 200-day SMA - for now.
(Source: Google Finance)

This indicator actually works quite well for most asset classes, and even individual stocks. Here's a neat write up that DailyWealth did on this in the context of Mebane Faber's "Ivy League Portfolio" a few months back.

Bottom line: A downturn may have started, but if you want to be safe, wait for a decisive break of the 200-day SMA.


In Case You Missed Them - Recent Blog Highlights

My Trading Activity - Short the S&P

So far so good on the S&P trade, as it fell hard and fast last week. Friday, granted, was on low volume. The push back up today was meager.

Short the S&P - this time it's working out, so far.

Playing devil's advocate, every market correction thus far has been fairly shallow - about 5%. We're in that range now. So if the uptrend is still in place, we'd expect to see a resumption upwards about here.

So I am not in a hurry to add to this short position yet - I'd prefer to see a breach of lower levels, and a confirmation of a downtrend in place. I expect the markets to fall at least 50% from these levels, so I'm not in a particular hurry to get short.

Have a great week in the markets! Comments are always welcome and very much appreciated.

1 comment:

Diego said...

I use often the Renko indicator. It worked so well during the present crisis. the Spy and similars not send the down trend but it a cuestion of time like Depeche MOde said in the song.
Be carefull and i think like you about a great correction will take a place in the future
Congratulations for your web from Argentina.

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