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This week the S&P 500 reached a trade metric used by many traders to sell: crossing the 200-day moving average when above the previous day. The last time this occurred was 683 days ago, November 20, 2012. Along with the decline was the previous month’s all-time high for the S&P, most analyst were predicting a “TOP” for the market, the highest it will be in the next 12 to 24 months. The research on this topic is amazing. I suggest all Lean Six Sigma Black Belts review the data since with variance there are opportunities for profit. The first article explains how 3 and 4 sigma levels are used for chart analysis.
Most traders use more than one metric to influence their trade strategy. While the 200-day moving S&P average is the most prevalent, there are others to consider. Currently all the other metrics point to a negative market return for investors. Here are some to consider:
• SELL – Equity only Put-call ratio: 2 year high
• NOT BUY – Total put-call ratio’s 21-day moving average: Under 0.90 ratio (rare)
• SELL – Market Breath: New all-time high on July 3rd signaling a several market decline
• TREND SELL – Volatility Index (VIX): Need 3 point or more increase over 1, 2, or 3 day period, if VIX closes below 14 will signal a BUY rating for the market
New research by Blake LeBaron, a Brandeis University finance professor, indicates a softer patch for the market. Since 1990, the 200-day moving average has been breached 85 times. In long durations of over 26 weeks, the returns are about the same with no statistical significance. In the short term, under 13 weeks, the profitable move was to stay invested in the stock market and not sell. The change in the traditional market signal is due to cheap online trading and the overall popularity of the 200-day moving average has eliminated the arbitrage profits.
Now it’s time to put my feet into this burning issue. I get all the charts and research. I also understand the adage “the trend is your friend”. One axiom to always understand is “follow the money”. In our case it seems all the federal governments across the world are going with the free money game, issuing more and more money at near 0% interest rates. This by definition will increase corporate profits especially when it’s harder for individuals to borrow than it is companies. Another point is that finding good returns in this market is tough outside of investing in Equities. Most dividend yields are higher than overall bond rates. Why wouldn’t you invest in high dividend yield equity stock when there is nothing in the market for you to get a similar return? Thus, you’re backed to a corner to stick it out in the stock equity market. There is bound to be a correction in the market, especially one during this long time horizon of free money by the federal governments. We are at a 9% S&P correction range currently. I’d expect this to continue for a few more percentage points mainly due to the aspects of external shocks resonating in the eco-system currently. Until the easy money stops or there is an unexpected external shock to the system, I’m jumping in the equity markets and enjoying the ride. Happy sailing!!!
Article Link: http://www.marketwatch.com/story/record-200-day-moving-average-due-for-a-fall-2014-10-07
Article Link: http://www.marketwatch.com/story/what-breaking-the-200-day-moving-average-for-stocks-really-means-2014-10-14
Gary Kapanowski – Lean Six Sigma Master Black Belt – Excelsior
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