Insights & Advice

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Resistance

 The dividing line that often separates bull from bear is the 200 day Moving Average (200 DMA). It is a technical term that tracks the moving average price of stocks over 200 days. All week equities have traded a little above or below that average, leaving investors uncertain of what awaits them in 2012.

“I always sell my equity positions whenever the S&P 500 Index trades below the 200 Day,” says a trader friend of mine, “and I don’t buy back until it rises above that level again and stays there for more than a week.” 

It is a rule of thumb that has worked for market timers (those who try to sell the rips and buy the dips) more times than not since 2007, but it is not foolproof.  There have been times in the past when stocks fell below that level only to rebound and continue much higher. Nevertheless, many traders take the 200 DMA very seriously. As a result you should too.

Every index has a 200 DMA whether you are looking at stocks, bonds or commodities.   Most investors focus on the S&P 500 as their key average when trying to read the tea leaves in the stock market. Today, the 200 DMA is trading roughly at the same level that marks a gain or a loss for the S&P for 2011. The S&P Index started the year at 1,257.64.

The 200 DMA is right now about 1,259 (although it will change since it is a moving average). Several times over the last few months bulls have attempted to break that line, but the resistance has been fierce. Each time the bears have thrown back the bulls’ advance decisively. So here we are again at the resistance line, but the Santa Claus rally has been fairly weak and prices have advanced on low volume.

Clearly, there is little we can read from the closing values of the S&P Index for the year. Given the enormous volatility investors have experienced, a gain or loss of 3-4 points and a close above or slightly under the 200 DMA is meaningless. It gives no guidelines for what will happen next.

On the bright side the U.S. has done much better than other global markets. The main markets in Europe have suffered their worst losses since 2008, thanks to the continuing financial crisis.  In Asia, the once-hot Chinese market dropped 21% for the year while Japan had its lowest close since 1982.

Their performance reflected a year that was plagued with natural disasters from earthquakes to floods, the Arab spring, trading scandals, wild rides in commodity, the complete dissolution of political leadership on both sides of the Atlantic and a continual widening between the “haves” and “have nots” around the world. 

Bond prices, especially in our U.S. Treasury markets, were one area of positive gains. Prices continued to rise, despite the downgrading of our sovereign debt.  Investors, spooked by the gyrations in the stock markets, flocked to this perceived safe haven.  However, thanks to the low rates of interest, yields in that market have in some cases turned negative, such as Treasury Inflation Indexed bonds (called TIPs).

Today, a 30-year Treasury bond is yielding 2.9% while the Consumer Price Index, the nation’s inflation gauge, has been running at a rate above 3%. At those rates, retirees who need income to simply stay afloat are not even breaking even with inflation.

I find it impressive that, despite the gut-wrenching turmoil, the U.S. stock market has held its own and is finishing even-to-up in the case of the S&P 500 and the Dow. It appears most of the bad news of 2011 has been discounted. Who knows, we may actually break that resistance and climb above the 200 DMA on the S&P 500. That may turn out to be my ‘famous last words’ but I remain somewhat optimistic. Despite the unknowns, I sincerely wish all of you the same joy and happiness you have given me this year. Happy New Year!

Posted in A Few Dollars More, At the Market