S&P 500 drops below 200 day MA

[cute fuzzy bunny]

There is a much discussed 'dirty market timing' method whereby one stays in equities (particularly the s&p500) until the price drops below the 200 day moving average for 5 trading days.

When it rises above the 200 day MA for 5 trading days, you buy back in.

Its not that twitchy an indicator. There have been a few short term 'falses' that didnt cost the investor very much. The most notable true indicator would have gotten you out of equities in september of 2000 and back in again in March of 2003, missing nearly all of the recent bear market.

We're now in our 5th trading day below the 200 day MA.

 

[azanon]

A couple of more days like today, and you'd be buying again.

 

[wildcat]

DCA all the way!! Market timing and following technical indicators is for the birds IMHO. If the theory was based on the fundamentals of equities then you may have a case. For example, if the P/E of the S&P 500 dropped to 10 (a fundamental indicator) then you have a strategy of timing or more like smart allocation.

 

[Eagle43]

Just another buying opportunity.

 

[cute fuzzy bunny]

Perhaps. I havent exactly wrung this theory out to the 9th degree, but I do note that it would have taken you out of the market during all of the 'major bears' and had you out of equities for most of the sideways 65-75 period.

Makes a bit of sense, a prolonged plunge in prices may be a good indicator.

It also doesnt appear that it would have kept you out of any of the major 'up' markets...in fact you'd be in equities most of the time in the past 100 years. The only major 'timeouts' were during the post '29 era, a good portion of the 65-75 sideways period and the recent 00-02 bear.

And yeah, looks like todays action may invalidate the 5 day down period. But man have we been bouncing along the edge of it for a bit...

 

[Marshac]

I think that many indicators (not all) are self-fulfilling prophecies that come true simply because people believe in them, and act upon them.

 

[lazyday]

I don't know a lot about data mining, but how do you know this isn't? In other words, could it be that it "just so happens" that this strategy worked in the past?

Or, if it was legitamate... you say in the first post that it's a much discussed method. So, lots of others are following it, and maybe even if it was a good method before, now that many follow it, would it still be a good method?

 

[razztazz]

So what if it "just so happened" to work in the past. It's worked for over 100 yrs. And of ourse it didn't "just so happen" That would be a cosmic confluence of "just so happenings" that could never be calculated. A statictical non-starter. Could that cycle or pattern change over the yrs sarting with today's close? Yes. Sure.

Wanna know how statistics work? The best predictor of what will happen in the fiuture is what has happened so far. Is THAT ALL there is? Of course not , life has more moving parts than that. However, I'll throw in that this is the exact same basis and the exact SAME DATA upon which the Buy and Bolders also rest their case.

And it's not data mining. That, (as I understand the term) is when you start with a conclusion ( A "WISH" to trade the 200 DMA) then find the data to make it look true and throw out the rest of the data. (Like Bush and Cheney. Sorry, couldn't resist)

It's been much discussed for over 100 yrs. Apparently we dont have to worry about too many people doing it. And of course the proposition that "everybody would do it" is theoretical anyway. Not everyone will be able to do it. People buy/sell/ hold/screw things up for good and ill all the time for all kinds of reasons.

A 200 DMA isn't enough to compell everybody into clone-like behavior or even a sufficient minorty/critical mass of people, as long as you have a huge and varied marketplace. In less favorable circumstances yes, too many cooks, you know

 

[Marshac]

And it's not data mining. That, (as I understand the term) is when you start with a  conclusion ( A "WISH" to trade the 200 DMA) then find the data to make it look true and throw out the rest of the data.  (Like Bush and Cheney. Sorry, couldn't resist)

Quite the opposite actually, data mining is when you run an analysis of the data to look for trends and groupings in the data that you didn't even know existed before. What you describe above is called 'Confirmation Bias.'

 

[wildcat]

Really the market is fairly efficient. There are a few strange anomalies that defy EMT (i.e. strategies that do seem to outperform the market on a risk-adjusted basis over time) & not a darn one of them has anything with technical analysis. 200 mva, candlesticks and whatever other pictures they make out charts is probably a waste of time. Marshac is right. People are quick to claim a strategy works when most of the time it is just dumb luck.

 

[BUM]

Dont know. Read books on stochastics and Bollinger bands, something there but too much for me. OTOH what investor can ignore those big drop opportunities?

I'm not big on indiv. stocks but I picked up some IBM at 77 and added to my Vanguard s&p 500 fund today. We'll see.

 

[haha]

OTOH what investor can ignore those big drop opportunities?

This one. I don't see the whites of their crummy bloodshot eyes yet.

Mikey

 

[Mr._johngalt]

I am one who can "ignore those big drop opportunities"
no matter how low prices plummet.

JG

 

[cute fuzzy bunny]

Yeah...I dont see the whites of their eyes either.

I cant even make out the head yet.

We bounced above the 200 day moving average for the 'big day' we just had, then dumped back below.

Four more trading days...

Bear in mind, I'm not acting on this necessarily. Its just another 'tool in the belt'. The three 'indicators' I look at are:

Morningstar fair value of the broad market; I tend to feel this overstates fair value...or maybe I'm just a cheap #%$#. When morningstar feels the market is fairly valued I feel like its 10-20% overvalued.
http://www.morningstar.com/cover/pfvgraph.html

Then there is ECRI's leading economic indicators; these have been most useful at finding upturns and downturns, at least historically. Their indicator was predictive of this downturn.
http://www.businesscycle.com/ (go to the bottom of the page)

And this 200 day MA.

Should we hit the 5 day under rule and its persistent, when the indicator turns back to positive again, AND the morningstar fair value is in the green...I'll probably commit some more of my cash. Looking at Wellington.

 

[windsurf]

This one.  I don't see the whites of their crummy bloodshot eyes yet.

Mikey

I love this assertion!!

 

[smooch]

TH, what is the 5 day under rule?

 

[cute fuzzy bunny]

See the first post in this thread!

If the s&p500 drops below its 200 day moving average for 5 consecutive trading days, that signals a 'sell equities'; when it rises about the 200day moving average for 5 trading days, thats a 'buy equities' signal.

There have been a handful of false 'sells' that didnt hurt anyone if they bought back in. As mentioned though, the non-false sells saved the average investor a buttload of money over the past century.

Providing it works again and it isnt 'all different this time'.

As I said, I wont use it as a timing strategy...I'm so frickin conservative right now in the portfolio that I cant bring myself to reduce my equity holdings any further...but I'll be watching this and the other info I keep an eye on for a buy decision after the carnage is over...

 

[ak4195]

Mutual funds are counting on people who for whatever reason ignore the technical side of markets,thats not necessarily a bad thing.Its called "The Transference of Risk."But to be fair,a well diversified portfolio is a good pony to ride.If one was aware of a few seasonal trends,,and maybe something like the time frame when mutual funds and pension pools tend to make there allocations,and yes even perhaps a few simple voodoo technical indicators one could improve there returns.Which imho should be the goal of every investor,if one is so inclined.Why should so much attention be payed to asset allocation,but so little as to when and to "un-when".
In a hurricane which would you rather be a stout oak tree or a bendable bamboo.Ill take the bamboo,hopefully sooner rather than later.Cheers to all
keep an open mind,life marches on, one day at a time.

 

[razztazz]

Why should so much attention be payed to asset allocation,but so little as to when and to "un-when".
In a hurricane which would you rather be a stout oak tree or a bendable bamboo.Ill take the bamboo,hopefully sooner rather than later.Cheers to all
keep an open mind,life marches on, one day at a time.

I was thinking more along the lines of: In a hurricaine which would you rather be? At sea, in the storm, in a boat no matter HOW strong and sturdy it is? Or would you rather be safely onshore, inland?

 

[ronin]

If we are going to live in Analogistan, how about being like the moon, in impassive orbit around all the turmoil? Or better yet, like the sun, occupy the center of our personal universe.

 

[razztazz]

If we are going to live in Analogistan,

I was stationed in Analogistan when I was in the Air Force, but other than that I can't tell you any more about it.

 

[cute fuzzy bunny]

I was thinking more along the lines of: In a hurricaine which would you rather be? At sea, in the storm, in a boat no matter HOW strong and sturdy it is? Or would you rather be safely onshore, inland?

Onshore, unless the boat was picked up by the hurricane and dropped on me...

It all goes back to not really arguing the long term benefits of the index and go fishing method...but the oft brought up discussion on entry points and valuation. Were I able to find a reasonably priced asset class with decent long term potential, I wouldnt be holding ~25% of my money in cash right now.

I think buying a broad large cap based index right now is a bad idea. Its been a bad idea for ~5 years now. If we go sideways 5 more years or get a 15-25% drop, I'll consider it a good idea again.

I have had excellent luck calling the 'tops'...I always get a little tingle of the "run away!!!" ilk. Bottoms are tougher to call for me, so I'm looking at a variety of indicators that have historically had some significance.

Theres a joke in that last paragraph, go ahead...