By Brandon Wendell, Online Trading Academy Senior Instructor and Trader Mentor
Well, this is the time of year for resolutions and market predictions. I have already been asked in the Online Trading Academy's Extended Learning Track mentoring rooms for my forecast for the markets for the New Year. I have not completely let go of my bearish stance for the year. Let's face it. Even though we have climbed from the depths of the 2009 market lows, we are not completely recovered. This market looks more like a wounded dog than a strong bull!
Looking simply from a cycle standpoint, this is the second year of the US Presidential term and is historically the worst for the equities markets. Theories include a wearing off of the promise of new initiatives changing the markets as well as tightening of policies designed to ward off inflationary pressures. Hmmm...sound familiar? Staying on the topic of cycles, years ending in zero are also notoriously poor performers. Add to this weak growth and high unemployment and you start to see the picture.
Let's shift to the technical side of it, shall we? The S&P 500 had been on a tremendous bull run. I'll be honest, I am confused as to the mixed messages the markets are giving me. I am writing this article during the first week of January. It hasn't finished yet and we have non-farm payroll data to be released Friday, January 8th. However, this week is showing a potentially major turning point in the S&P 500 Index. The chart below shows two bullish signs.
The first is the break of the downtrend line on a semi-log chart. The semi-log chart shows all percentage changes in price equally instead of all price changes equally. (A $20 to $30 = 50% increase and $100 to $150 = 50% increase, both would cover same distance on the chart).
Figure 1 Additionally, the 40 week simple moving average is crossing the 80 week simple moving average. This is an indication that I use to determine bullish or bearish market reversals. As you can see from the following chart, this indicator has worked well for the past 20+ years.
Figure 2 But before you go out and buy every stock in sight, let's look back to another time in our economic history where we had poor growth and high unemployment, the 70's! Looking at the 70's we saw stagflation, high unemployment, slow growth and high inflation. You may argue that we do not have high inflation right now, but what do you think the long-term effect of printing too much money will be? Let's apply the 40-80 SMA indicator to the 70's and see if it helped navigate the markets.
Figure 3 We see that an investor in the broad market in 1968 had nothing to show for it in 1982 except an exciting ride watching their portfolio swing between highs and lows. However, a trader or proactive investor who was aware of the turns wouldn't catch the tops and bottoms, but prospered in the uncertain times that we may soon face again.
Overall, I have to say I am a cautious bull. I'll be the first to admit that I didn't think the current rally was for real, but successful traders aren't ones who catch all tops and bottoms. They are the ones who let the market tell them what to do. This market is telling me to buy, but beware.
Have a great day.
- Brandon Wendell bwendell@tradingacademy.com
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