Wednesday, January 16, 2008

Whither the Stock Market? (II)

UPDATED (03/12/08)

On November 14, 2007, I wrote:
Is it possible that the current bull market reached a temporary peak in May of this year, and is now descending toward a secondary bottom that it will not reach for a few years?
This was my tentative answer, then:
A reversal that lasts a year or two seems entirely possible to me.
My less tentative answer, now, is that the stock market (as measured by the Dow Jones Wilshire 5000 Composite Index) has crossed into "bear country." That is, it has met the two conditions which indicate a "correction" or bear market that will last for months or years:
  • the index has dropped below its 250-trading-day average, and
  • the 250-day average is moving downward (if imperceptibly).
To see that this is so, go to BigCharts.

1. At the top of the page, in the box for symbol or keyword, type "DWC" and click on the "advanced chart" button.

2 A list of "companies" will appear. Select "Dow Jones Wilshire 5000 Composite Index" by clicking on the icon for that item which is labeled "A."

3. Then, make the following entries or selections in the panel on the left side of the screen:
Time Frame
Time -- select "1 year"
Frequency -- select "daily"

Moving averages -- select "SMA" and type "250" in the box to the right of that

Chart style
Price display -- select "logarithmic"
Chart size -- select "medium"

At the bottom, click on "save chart settings." Then, return to the top of the panel and click "draw chart." Change the length of time to "1 month, "2 months, "3 months," and "6 months," then redraw the chart each time.
What you will see in each chart (as of today) is a dip in the 250-trading-day average. More obviously, you will see that the value of the index has moved below the 250-day average. It is therefore likely that the market has entered a downward phase that could last for months or years.

To see why, change your "Time" selection to "all data" and redraw the chart. The resulting graphic shows 25 years of the index and its 250-day average for the last 24 years. You can see that a market downturn of several months' or years' duration has ensued whenever the index has dropped below its 250-day average and the 250-day average has turned down.

On the other side of the coin, how can you know -- for sure -- when a downturn has ended and the market is in recovery? Answer: The end of a downturn is confirmed when the index rises upward through the 250-day average and the 250-day average is rising.

Regardless of the current state of the market, please remember this:
Don't bail out now, unless you absolutely, positively need the money. I could be wrong about the reversal. In any event, stocks are for the long run.
P.S. By my reckoning, every downturn in the 250-day average since 1970 has signaled every recession since 1970.