Chart of the Day: S&P 500 stocks above 50-Day moving average – is this bullish?
Here’s a chart that Bespoke Investment has drawn up.
Bespoke says:
The percentage of stocks in the S&P 500 now trading above their 50-day moving averages is down to 4%. At the March 2009 lows, the reading only got down to 5%, so that gives investors a good idea of just how extreme this decline has got.
The market has seen seven consecutive days of decline and is now 16% below its high. That’s very close to bear market territory. David Rosenberg says the forward P/E based on consensus earnings estimates is only 12.5x earnings. Clearly, the market is oversold. All of these are extreme negative but contrarian indicators of course. The contrarian in me sees this as bullish.
However, the market has confirmed its breakdown below its 200-day moving average decisively. Fair value is probably more like 900 than the present 1022 on the S&P 500. And on a fundamental basis, some indicators are almost flashing double dip.
Technicals are saying oversold while fundamentals are saying more to come. Which is it?
Source: Percentage of S&P 500 Stocks Above 50-Days Down to 4% – Bespoke
I think that it depends on your time horizon. Short term, following technicals is essential. But for longer term investing (say 6 months), the focus should be more on fundamentals. I do the latter, and ignore technicals and just absorb whatever short term pain that comes my way.
Technicals are valid only within a relatively narrow band of real-world conditions. Keeping things within that band has been the macro policy of every realpolitik world regime since the Scottish Enlightenment. When macro gray and black swans rule the roost, the macro psychology of the market is different, and technicals aren’t much help anymore.
If this is a normal market we should bounce here, maybe sell off again and then start a sustainable advance. If this is not a normal market ( personally I don’t think this is a normal environment) we could stay at these levels for weeks or months.
technicals are essential for risk management. “Buy and Hold” investing has been shown to not mitigate risk in a portfolio as well as asset diversification when including results up to 2008. Technicals seem to be more a weapon of trading, but has the market really turned out to being anything more than that? Are long term investors really confident in equities to persevere?