Simple moving average suggests 6 to 12 more months of the bear

[TWiley]

today i saw an analyst apply a strategy that uses the 200 sma(simple moving average) on daily charts.... his point of showing the chart was to suggest when a cross might occur... marking his beginning to the next bull market .... the chart below shows 6 to 12 months of bear market remaining, take your pick...



Remember, this is guesswork that is based on trends.

[GoesTo11]

1. If this worked, the analyst would be a billionaire not an analyst.

[TWiley]

7. what method do you use?

The shear number of people who do almost makes it a pre-determined event. Now, if absolutely nobody traded based on moving averages..... then you would be absolutely correct.

Part of the theory behind it is that it averages all investors fears and emotions. Tech analysis is good to a point, but the emotion of the market can easily replace fundamentals. The market is rarely efficient anymore, it tends to fluxuate between grossly overpriced and insanely oversold. This is the evidence of emotion and not fundamental analysis.

What method do you use?

[MannyGoldstein]

13. There Is No Evidence That Anyone Has A Method That Works

Broad statistical analysis of portfolio returns shows that the distribution of returns is indistinguishable from what we would expect from random guessing - a lovely bell curve centered around the S&P 500.

[TWiley]

15. well, how about the "buy and hold" method of a S&P 500 index fund?

There are a ton of bogleheads who invest exactly that way.

[MannyGoldstein]

17. I Guess What I Really Meant To Say Is What You Just Wrote

By "works", I meant "that works better than buying and holding a piece of the S&P 500", but the way I said it was convoluted (distribution centered around the S&P 500). There's no evidence that anything has a better method than Bogle's.

[TWiley]

22. well, your investment in the S&P 500 is worth about what it was 10 years ago

Bogle did a tremendous amount for the little guy by introducing an investment opporunity in index funds. Low cost, with a cross section of companies which represent market weight.

It is the "hold" part that has become troublesome. It is extremely difficult to time the market with much success. Most investors are short sighted and too impatient. Bogle liked to say that the market tends to revert to the mean. this implies that the market is only efficient at the mean which is also a geometric average.

Looking at this chart, wouldnt you be happy to have sold at the major downward cross and re-purchaced at the major upward cross? Yeah, me too. Rebalancing is the best we have.

This trend represents hope and not fact. Some call it wishful thinking.

[Dr.Phool]

42. There's a ton of broke bogleheads.

Economics experts that I read, such as Roubini, say stay the fuck out of the market for the next several years.

If I decide to jump in, I'll invest in a Ouija board. The markets are corrupted and manipulated.

[GoesTo11]

18. I don't pretend to know which way the market is going

(my ignorance in this area is very clear to me now after not knowing when to sell last year). I think you have to look at avoiding fixed games (investing with crooks), and then within the game you do play, pick the strategy that makes the most sense given your life circumstances - what's your horizon, how much can you lose, and how do your investments fit with other aspects of your financial life such as your career, your house, and family members money resources and needs. For example, someone on a fixed pension with no cost of living adjustments might be especially vulnerable to inflation, so they might do well to buy TIPS - not because I expect those to go up, but if there is inflation, the person will need to hedge the hit they take elsewhere.

I think most of the time when someone claims to know where the market is going, they want something from you - sometimes just your attention and respect, sometimes they want you to invest with them or let them sell you some product or make trades on your behalf (and then they make money whether the market goes up or down, so long as you do anything with them at all).

[TWiley]

21. Right you are .... you will notice the word "guess" in my O.P.

Myself, I prefer an asset allocation similar to what Roger Gibson advocated in his book "Asset Allocation 4th Edition" Some thinking and assembly is required when it comes to investing in the capital markets.

I found the chart interesting because myself, like many others I presume, are interested in "if or when" economic recovery may occour. The only thing I can say is that I highly doubt it will happen before this chart suggests that it will, and I am extremely hopeful that it will not take any longer.

[zagging]

45. I agree

If that sort of technical analysis worked, there would be a lot more millionaires. Throw the bones, read the tea leaves. It's all the same thing.

[TWiley]

47. here, click on this

http://www.youtube.com/watch?v=SBfpYqrrzgQ

[zagging]

53. Like you said, guesswork

I've seen more than my share of debates over technical indicators. If you get 50 technical guys in a room you'll have 50 different opinions, but one of them will invariably be correct...this time. Watch any financial station on the tube and you'll get my drift. Hang out on a stock forum for a while and you'll readily understand that the 200sma is one of hundreds, possibly thousands of technical indicators. If you still don't agree, learn some indicators and trade on them. If you already do, why aren't you on your yacht?

[NightWatcher]

2. we are nowhere near the bottom

[TWiley]

6. how do you know that?

[JackRiddler]

50. What's the total on derivative bets that must be paid or defaulted on?

[customerserviceguy]

34. I agree

although all I have to back it up is a gut feeling. When I started putting money into a 401K again last year (all I had was temp jobs for a few years) I knew the market was the wrong place to be, so I put it into a bond fund, moved it out of that to a Treasury fund, and from there into a money market fund. I'm getting dick shit for interest, but at least my principal hasn't gone away.

[TWiley]

38. here, check this out

http://www.youtube.com/watch?v=SBfpYqrrzgQ

somebody else posted this further down in the thread

[Zynx]

3. I have been skeptical of these sorts of analyses for a while.

I believed them for a time and they caused me to be more optimistic than I should have been. Look at how many times the 200-day SMA was violated in just this chart with no real consequences. This is a classic case of correlation not meaning causation.

[TWiley]

10. I think you may be interpreting it incorrectly.

Not everyone sells each time it crosses below because investors tend to hold. There is an event called "capitulation" where lots of people spontaneously sell. This is the event that usually signals a market bottom. Nobody knows when it will happen, but when looking at charts, it is the longer term events and trends that are more significant.

Right now there is a ton of cash on the sidelines. Lots of fuel for a recovery when the emotions of the majority of investors indicate that the corner has been turned. This chart simply implies that this could happen in 6 to 12 months.

[Zynx]

11. Once again, I think this is good for a backward looking explanation.

I question its predictive powers very strongly. I've read or watched 100s of compelling technical analyses that end up being entirely wrong.

[TWiley]

14. Yes, backward-looking is accurate ... forward looking is highly questionable

but, like it or not, this chart represents far more data than the average talking head on tv will offer to back their opinion.

[theoldman]

4. No one is smart enough to know when the market will hit bottom.

Of course someone will make a lucky guess and then become famous. I have seen this happen before but these people never guess it right the second time. The only way to really know when we have hit bottom is when the market starts to go up again. My guess is not next week.

[TWiley]

8. It is an average of investors emotions

You are right, nobody knows when it will happen. It is only clear in the rear view mirror. Trending reveals the average of investors emotions. Most invest with their heads and hold with their guts. trending reveals both aspects.

[gratuitous]

25. The exact day and hour nobody knows

But the times and the seasons foretell the change. I don't think "six to twelve more months" is a particularly precise forecast, but it does give people a time frame for thinking about this. The unrealistic bloviating in the popular media is designed to make the public think that this will all be resolved with wave of a magic wand or the proper recital of an incantation.

But it has taken many years of dedicated market manipulation by the greediest, most dishonest motherfuckers to walk the earth since the earth cooled, and they were given free rein by an administration that was negligent at best. Restoring balance and cleaning out the accumulated muck is going to take some time, and there is no Hercules to divert a river through the Augean stables that our financial markets have become.

[TWiley]

5. .

. posted in the wrong part of the thread by accident

[sandnsea]

9. When people stop losing their jobs

and consequently needing to live on their life savings, then the market will see the bottom.

And what happens to the company's part of the 401K when they lay off 1,000 people?

[TWiley]

12. Typically, there is a "vestment" schedule

It is common that an employee will recieve 100% of an employeers contibution after a specific length of service. Usually around 7 to 10 years. Up to that point, they are entitled to an increasing percentage each year. The employee is always entitled to 100% of their contribution.

The company keeps the part not vested in the employee if the employee is terminated. A simple layoff with a later recall to work should keep the vestment clock ticking.

[sandnsea]

20. 600,000 people laid off

In January, right?

How much money came out of the stock market as a result?

[TWiley]

24. well, lots of money is not going into 401k accounts

that is the absolute truth. That is one reason why employment is so important, so much more important than tax cuts. If unemployment reaches a critical point, then a death spiral begins.

[sandnsea]

27. So you can't use past averages

Because we are not in a financial crisis that we've ever really faced before. Tell me when the world's biggest banks ever blew the bulk of the world's investment money before.

[TWiley]

32. well, we are in not-recently tread territory for sure

but, people remain the same. People are the markets. Tech analysis is the brain, but the emotions rule the decision. This part has not changed.

What I think will happen is this:

1) Large numbers of investors sell and are scared off (captulation)
2) prices plumet and P/E ratio's become extremely attractive (I think it was somewhere around 4 to 1 after the big one)
3) institutional money will act on tech analysis
4) average investors will notice an upward trend, talking heads will chirp
5) Average investors will chase performance back into the market.

[sandnsea]

35. You're making the same mistake the big banks made

You do not understand that there is not enough money in this country for every day people to pay their basic bills. It has NOTHING to do with fear. No Credit=No Money. And the big banks lost the money to create the credit. That's the problem. There isn't any credit so people have to cash out in order to pay the bills.

[TWiley]

37. well, the capital markets crashed.

dow 14,500 to dow 7,500 means that over 100 trillion dollars evaporated. you are adressing the result of this money disappering. the govt has tossed 2 trillion back into that hole to get some cabbage for circulation.

Here: look at this, someone else posted it in this thread

http://www.youtube.com/watch?v=SBfpYqrrzgQ

[sandnsea]

39. I am also addressing the cause

The mistake the dumb-ass financiers made when they created these mortgage/credit securities that they traded into astronomical sums.

Working People Cannot Pull Money Out Of Their Ass.

You cannot just raise interest rates and expect people to be able to keep paying. Normal people have limits to their income.

Financiers just do not get it because it's all figures on a page to them.

That's why there was a capital market crash.

And they still don't get it and neither do you.

[TWiley]

43. which part do I not get?

I was hoping that an end in sight would be good news

[sandnsea]

49. You can't apply a formula to this

Please tell me when the world's financiers LOST the bulk of the world's investment money. All over the world. Everybody's. Oh, and don't forget that they recently changed the law to allow banks to use depositor money differently too.

Tell me when that has happened, and then you'll have a metric to apply to the current situation.

[TWiley]

56. ok

"loosing the bulk of the worlds money" is not a singular event. In fact, it may not be over yet. That is what the guesswork indicates; another sell-off with an increased possibility of recovery (or at least stability) after that.

It is a simple fact that the lower the market goes, then we are necessarily closer to the bottom than we were when the dow was at 14,000. This is not advanced reasoning. The tricky part is when.

In my opinion, the republicans caused this mess, and their actions today are a delibert attempt to extend the disaster. Their plan could backfire. Their hysteria could actually trigger an epic sell-off which would most likely land us at the real bottom sooner.

[Coyote_Bandit]

16. Ummmm......

Predictions of the future based on past experience assumes that the past will repeat itself.

Markets cannot be timed.

Stocks and stock markets are valued based on exprected future earnings - something that a simple moving average completely ignores.

[TWiley]

26. not entirely correct, prices are dropping faster than earnings

growth is turning into value. earnings are droppiing also, dont get me wrong. it is just that prices are dropping faster. it is called capitulation when it reaches a critical point.

Bogle said "the market tends to revert to the mean" is that not a prediction? Furthermore, why invest in the capital markets if the past 100 year experience has no value?

The idea that the market is "efficient" and that every investor uses technical analysis based on future earnings is the flaw in reality. Most investors chase performance, and wind up buyiing high and selling low as a result. The average investor is not a professional, he (or she) is an employee somewhere that offers a 401k plan.

I think we can both agree that at some point the p/e ratio will become so attractive that lots of money will flow into the capital markets. The emotional investors will notice this trend, and follow suit.

[Coyote_Bandit]

54. Most professional investors

are largely invested. I used to work as an investment portfolio manager. Our investment policies, our implementation technology, and our contracts with our clients strictly limited the amount of cash we could hold uninvested in accounts. Regulatory reviews and audits of trust assest managment also require that funds be invested typically with accounts being permitted to hold no more than 10% of total assets in cash or cash equivalents.

There are many books that address nothing more than how to value stocks. I don't know if you have read them or not. Unfortunately, I have. There are several different theoretical models. In some form all of them discount future cash flows from earnings including dividends and stock appreciation. Virtually all of those formulations require assumptions as to the risk premium, the risk free rate and future expected earnings. Given the present level of economic uncertainty those are some pretty significant assumptions.

You may think that prices are dropping faster than earnings. However, significant changes in the risk premium and the risk free rate have impacted that relationship.
You can't assume a direct correlation. The relationship which existed a year ago is very differnt from the only that exists today. Also, investors (the professionals at least) are discounting those earnings estimates. Consumer confidence is declining daily - and with it future earnings expectations. There have been several scandals surrounding analysts and their earnings estimates.

[Greyhound]

61. Calling that person an investor implies that that person is making decisions,

which is a smoke screen to protect the "professionals" that are making the decisions for that 101(K).

The investors are he institutional fund managers and the market owners (makers).

[Thickasabrick]

19. Add a decade to that and I'd agree. eom

[TWiley]

29. that is what happened in japan ... 10 years no growth.

I do hope it does not turn out the same way here

[Thickasabrick]

41. Me too...but it seems like all the really smart people that study things

like that are saying the parallels are just too similar and we aren't doing enough to stop it. I think we are really screwed for awhile.

[TWiley]

46. The biggest problem is the Republicans

They caused most of the problem with tax cuts and de-regulation. Now they are obstructionist. If tax cuts work so well, then lets not send any money to the republican party. by their formula, it should make them stronger

[FarCenter]

23. Why would a digital filter with 200 equally weighted taps make any sense at all

The frequency response has a lot of powerful side-lobes.

[TWiley]

28. which filter would you suggest?

the point is to look at broad index that might reveal emotion mixed with tech analysis. market bottoms are emotional events and not based in tech analysis. The same is true for bubbles.

[slipslidingaway]

30. This video on the direction of the moving average might be of

interest to you.

He covers the weekly SPY from the mid 90's to 2007 with the 200 sma.

A link helps :) and this was from November 2007.

http://www.youtube.com/watch?v=SBfpYqrrzgQ

He does a nightly update BTW, but he is a short term trader.

[TWiley]

36. FANTASTIC POST .... THANK YOU

He really nailed it didn't he?

[slipslidingaway]

40. YW and yes he did...

there were signs the market was not as healthy as it appeared in the spring/summer of 2007. Specifically the McClellan charts were heading down and or not making new highs while the stock market continued to climb.

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=327&topic_id=716&mesg_id=716

About the McClellan Oscillator and Summation Index

Not sure how many people watch the McClellan indicators, but I thought it might be useful information for people who are managing their own funds...



Understanding Patterns and Sequences in the Stock Market

or maybe the title should be big money leaves tracks :)

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=327&topic_id=778&mesg_id=780

"...There are usually four major modules of the stock market sequences to understand:

Accumulation stage: This phase takes place, once the market has faced failure. The early adopters and innovators start purchasing, thinking that, the most awful condition is over. At this stage, the valuations of stocks seem to be very attractive. Hence, the overall market condition begins to change from pessimistic to optimistic.

Mark-up Stage: At this stage, the market slowly starts rising and picks up momentum. The investors feel free and start trading, as the market supersedes its failure. Valuations of the stocks mount well beyond their historic norms. Thus, it is the perfect time to buy and sell shares.

Booming stage: This is a stage, where the stock market attains its full prosperity. There is a lot of happiness. Profit and good valuation exist in the stock market business. Investors deal largely during this period. This is a perfect time to sell shares, since you can expect high profit in this phase.

Mark-Down Phase: This is the final stage of the stock market, where everything seems to be slip-up and failure. Prices of stock market come down and investors suffer loss..."

[TWiley]

44. I have a feeling we are in the final phase

I am seeing signs of capitulation

[slipslidingaway]

51. We're close, not sure we are there yet...

FWIW...

http://decisionpoint.com/ChartSpotliteFiles/090220_retest.html

[TWiley]

55. Thanks .... another great link

I increased my cash position about 3 weeks ago. It is hard to sell something that is down 50%, and it is equally hard to hang on to it. It was my hope that I could re-buy it 15% to 20% lower.

I agree, we are at a real dangerous time in the market. I suspect there will be yet another sell off, and recovery will begin some time after that.

At least ... that is what my hunches and guesswork seems to indicate to me.

[slipslidingaway]

64. YW...question I meant to ask, who is this analyst and does he/she

have a website? I would like to know what was being said at previous turing points.

Carl Swenlin is not always right, but he has a great website with many interesting charts, although I am not currently a subscriber.

Since he has a symmetrical triangle on the chart you may want to read a little more on the subject, the volume on the pattern is a reason for concern as it should diminish with the formation of the triangle. Timing the market is hard work...good luck.

"http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:chart_patterns:symmetrical_triangle

[TWiley]

48. Oh, I forgot ...

would you care to offer your thoughts on the graph I posted? I do understand it is highly speculative, and I am sure you do as well

[slipslidingaway]

52. Hard to say because I've never seen anyone use that as a basis

for timing.

:shrug:

[GoesTo11]

31. Interesting pattern

I haven't looked closely at these trend lines before. That sure doesn't look like the random walk that finance books assume. There's got to be some autocorrelation. The thing is, you still have to know if it's going to turn and when it does turn it turns sharply so if you try to ride out the trendline you get jerked on the next move. But it might mean that options priced on the Black Scholes basis of lognormal returns would be underweighting the tails somehow.

For now, though, I feel like we're at the point where even the shoeshine boy is giving a tip to sell your stocks. I suspect we've already overshot by a little bit -- the economy isn't dead, it's just down for a while if Obama is going to keep trying reasonably sensible ideas until they work - although we'll probably overshoot by more. I don't know how much more, and selling into a a market full of fear is no better than buying into a market that looks like a bubble hoping to get a few good points. Or maybe I'm simply justifying staying with my losses. Who knows?

[TWiley]

33. You will notice that the bottom is 6 to 12 months long

There should be plenty of time to feel your way through it. I think the best thing to take from it is that it suggests that we are closer to the end than we are to the start.

Remember, capital markets are forward looking. recovery begins with the stocks and then it goes into the broader economy.

[Gin]

57. if he can predict a new trend based on "trends" was he able to predict the new

"trend"/meltdown we are experiencing now?

[TWiley]

60. Yes, he and many others did

here, check these out

http://www.youtube.com/watch?v=SBfpYqrrzgQ
http://decisionpoint.com/ChartSpotliteFiles/090220_rete...

[MadHound]

58. "Remember, this is guesswork"

Yes, that's exactly what it is, guesswork. Educated guesswork, informed guesswork, sure, but guesswork none the less. And as with any guesswork, educated or otherwise, it is subject to being disasterously, horrendously wrong, in fact it usually is.

Frankly we're in territory that nobody has been before, except for possibly the Japanese, and even then they had a manufacturing base to help pull them out. We don't have a manufacturing base anymore, just a service economy that is based almost entirely on our consumers purchases. When consumers don't purchase, people get laid off, they don't purchase, and around and around we go.

Thus, this guy has as good a chance as somebody who consults the tarot deck of being right, no more, no less.

[TWiley]

59. Well, mathmatics does create powerful predictive models

It cannot be assumed that it is the case here, but it should also be noted that actuary's use math to predict all sorts of things.

It is guesswork non-the-less.

here .... you may be interested in these math models:

http://www.youtube.com/watch?v=SBfpYqrrzgQ
http://decisionpoint.com/ChartSpotliteFiles/090220_retest.html

[BlooInBloo]

63. It's always funny watching people who know nothing about maths....

Talk as though they have something interesting to say about its limitations.

[BlooInBloo]

62. (shrug) Might. Might not.