Using The 200-Day Moving Average As A Technical Indicator?
The Dynamic Wealth Report
February 23, 2009
New Lows On The Market... Is It Time To Buy?
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.
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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?
Take a look at the chart, the market fell.
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.
Just look at the chart.
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.
• Internet (Up 9%)
Year to date, the internet industry is outperforming most of the market.
Some of this is tied to the thinking technology stocks will lead the
market out of the recession. Helping lead the industry higher is
Akamai Technologies (AKAM), it’s up more than 30% this month.
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