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
- James Altucher of Formula Capital calls the American Dream of home ownership a complete scam. Renters, you’ll love this one.
- China is flushing the economic turd that is the rest of the world right down the toilet. Few notice that China’s rally peaked in August of 2009.
- Finally, you know we’re screwed when Fidelity.com is looking for Joe Sixpack’s to interview about the end of the financial crisis.
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.