Stock Market Downturn Risks Based on Moving Averages
Thursday, November 15, 2007 | Leonard Joesten Is this Spam?I can calculate the odds of a downturn in the stock market as being much greater than 50% based on the Russell 2000 index and moving averages. This index is a good indicator of smart money investor sentiment.
Take a look at this chart of the Russell 2000 ($rut) ...
First, the 26-week moving average is concave downward (like a coffee cup being held upside down). Negative.
Second, on September 1, the 13-week moving average crossed from above to below the 26-week moving average. This is probably the most negative moving average indicator of all. Extremely Negative.
Third, the current price of the Russell 2000 is below both the 13 and 26-week moving averages. Negative.
In fact, all moving average indicators are negative. Nothing is positive! Does this mean that the stock market has to move down? No! Only that the odds of its moving lower are greater than 75%. If you throw dice on a table, double sixes can still show up, even though the odds are only 1 in 36. But I go with the odds. I have reduced my exposure to stocks to about 15%.
Where do I put the rest of my money? I'm invested in areas with indicators the opposite of the above. I look where the 26-week moving averages are concave upward (like a right-side up coffee cup). I look where the 13-week moving average is moving up toward, crossing, and up away from the 26-week moving average.
Such positive investing areas include: money market, medium-term bonds and long-term bonds. In a few weeks or months, convertible securities and preferred stocks will probably also meet this criteria.
Moving averages can't predict the future; they can only describe the past, speculate, and project into the future. If you make money now in the stock market going forward from here, you have beaten the odds. But you're not necessarily smart; just lucky.
Me, I'd rather go with the odds.
