Morning Market Thoughts

by DAN Good morning. The market is opening weak this morning, which is kind of a nice change. Last night I was looking at the S&P and ruminating on the current status of stocks. Here are some of my conclusions:

The last two big selloffs have occurred from levels where the S&P was trading at the 200-day moving average in a relatively horizontal manner. Both times (last August, and in January) the selloffs really accelerated when the index pierced the 200-day moving average. Check it out on your chart. The 200-day moving average provided support in July on 5 different occasions. On the 6th test, the S&P fell below the 200-day moving average, and the S&P fell 10% in 3 days. In December, the S&P was trading on both sides of the 200-day moving average, essentially making the 200-day moving average a magnet for prices. That was a “reversion to the mean” dynamic. But when the S&P only managed to get above the 200-day moving average for one day before reversing, the ensuing 12 days brought a decline of 12%.

In other words, the 200-day moving average is extremely important to money managers. They’ll buy stocks when the 200-day is support. They will remain in the market as long as stocks stay in the top zone, buying dips gently. It takes quite a while for the 200-day moving average to catch up with high prices in order to have a chance at a big correction.

I will cover this later today in the strategy session. Meanwhile, just get ready for more sideways consolidation, with no foreseeable catalyst for a big decline. You’ve always got to be protective of your portfolio by managing position size (not too much in one stock), and having stops placed in all positions — either full stops, or just partial stops that automatically reduce your position if your stop is hit. Using a partial stop has the benefit of making you breathe easier after a pullback because you don’t have such a big position. It’s easier for you to think clearly.

Anyway, I think we’re in for some sideways trading behavior for the foreseeable future. This can be good for us, as long as we are in trending stocks that are outperforming the S&P. And those are the stocks that I will be working on!

See you in the forum.

–Dan

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