NEW LONG-TERM SELL SIGNAL GENERATED
As you can see in our Decision Point Alert Daily Report below our Trend Model has triggered a Long-Term SELL signal for stocks. This occurs when the 50-EMA crosses below the 200-EMA. It has been headed this direction for quite some time so it is not unexpected. Note on the chart below that the margin on this signal was a 50/200-EMA difference of 0.01. Not much, but as long as price remains below those EMAs, the distance between them will continue to increase.
In the daily chart of the SPX we see prices moving up toward resistance in the descending wedge. With our short term indicators still bullish, this could continue.
Our indicators are now looking somewhat schizophrenic with the PMO turning up and moving toward a positive crossover along with other indicators looking bullish in the midst of a new long term SELL signal. This new long term signal gives us a read on the environment in which our shorter term indicators and signals now operate. It tempers our conclusions. Carl’s Learning Center article ”Bull or Bear Market Rules“ explains this best.
As we discussed Wednesday, our bullish short term indicators tell us a move toward resistance could continue. But our environment is now bearish and with the bullish descending wedge being the dominant medium-term pattern, and, ultimately, lower prices should follow even as we move up inside this wedge.
Bottom Line: A new long term stocks SELL signal has been generated based upon a “death cross” (opposite of “golden cross”) of the 50- and 200-EMAs. Decisions in the intermediate and short term now need to take this into account. Nevertheless, short term indicators continue to be bullish and and there are now positive divergences on medium-term indicators. So we have a positive theme developing in a negative longer-term context, but we should consider it to be a temporary development.
I looked back at the S&P over the last 20 years and this is a very reliable signal both ways.
The signal is too late to be of value. From Barrons this week:
“The Chart Store (www.thechartstore.com) had surveyed all the “death crosses” since 1930 and found that somewhat more than half the time, stocks were higher a month or two later.”
They’re talking about exponential moving averages instead of simple moving averages. I don’t have good enough charting software to look back that far – perhaps someone will. But going back seven years, there have indeed been several times when the 50 day simple moving average has crossed the 200 day. However, only at the 2007 market top did the 50 day exponential cross the 200 day exponential. In all the other instances, the 50 day exponential came near the 200 day exponential but did not actually cross it.
Heck, with the ECRI’s LEI dropping for 14 consecutive weeks to -8.3 you have to know we are on the verge of a double dip and a major correction. It just comes down to how good your nerves are and how much you are willing to lose if you are wrong.
Reading the Decision Point comments leaves you in limbo–
Is the Trend Up or Down?? (“Our indicators are now looking somewhat schizophrenicis”).
Some traders look for ADV/DEC lines or Bullish Percent Indicators to give them a guide to direction–when the Short and LT/Intermediate Indicators are at odds
AWF is here to suggest an Indicator for you to review.
Do you remember that Old Fashioned “Stock/Bond Ratio”
Why is this “Ratio” important–because it tells you Investor preference.
Do Investors want the “Safety” of Bonds? or
Do Investors want the “Risk” of Stocks?
How to calculate the Stock/Bond Ratio–
You must know some Basic Math—Here we go
What you are going to do is Divide a Stock Index by a Bond Index to get the “Ratio”
NOT JUST ANY Stock Index!!!!!!!!
USE the “RSP”–This is the Rydex Equal Weight Index of The S&P 500–
It is CRITICAL that an “EQUAL WEIGHT INDEX” be used!
Use the “VUSTX”–A very good proxy for the Long Bond.
You can download the historical data from yahoo or some other source.
Weekly Closing Price is adequate for this Indicator.
NOW all you have to do is DIVIDE the RSP (Wkly) by the VUSTX (Wkly)= the Ratio
I prefer to Subtract the Log(Price) of the RSP from the Log(Price)of the VUSTX
And you never thought you would use Logarithms.
Next calculate an EMA of the WKLY Ratio Data–I use.07 as a Smoothing Constant.
The EMA is your Signal Indicator
IF the EMA is Rising : Investors prefer Stocks
IF the EMA is Falling: Investors prefer Bonds
Currently the EMA is Falling = Investors prefer Bonds (Safety)
Past Signals:
Sell 07/23/07–Prefer BONDS
Buy: 05/28/08–Prefer Stocks
Sell:06/16/08–Prefer BONDS
Buy: 04/17/2009–Prefer Stocks
Sell:05/07/2010–Prefer BONDS
Until this Indicator Turns Up—PREFER BONDS
I hope you find this indicator usefull in your investing
Use it in addition to the 50/200 indicator.
REMEMBER–This is not a Perfect Indicator–it is to be used along side other Technicals.
REMEMBER–No Warranty or Guarantee given!
Your Trading Decisions are your own!!
this ema needs length
Two comments:
1. The preference for bonds can also be looked at with Robert Shiller’s data on a monthly basis. Just recently the preference hadn’t been higher than at any time since 1960. The earnings yield on stocks was almost double the yield on 10 year bonds. For full graphs on this see my article:
The Relationship Between Stocks and Bonds: What Just Happened?
http://seekingalpha.com/article/213146-the-relationship-between-stocks-and-bonds-what-just-happened
2. There can be long periods of whipsawing with using moving averages as indicators. For an example of the dangers please consider the Dow between 1998 and 2003. See the full graphs and some issues you might like to consider in my article:
Whipsaw warning!!! Whipsawing is bad for your wealth!!!
http://seekingalpha.com/instablog/508569-paul-hanly/81021-whipsaw-warning-whipsawing-is-bad-for-your-wealth
Explorer sais :
There can be long periods of whipsawing with using moving averages as indicators.
Please consider the use of Monthly Moving averages on the PRICE DATA for the S&P500
http://dshort.com/articles/monthly-moving-averages.html
I believe even better results can be obtained by the use of the Log Price and then smoothing with .15 as the constant.
The Earnings Yield is a “Fundamental” Evaluation Technique– I find it usefull MOST of the Time
Currently in an environment of “Distressed Interest Rates” it is NOT USEFULL.
I’m certain someone’s HEAD is going to explode!
JT:
Remember this indicator is used to determine MOVEMENT between Stocks and Bonds
consequently a little quicker EMA is better — .05 (40wk) as a constant also works.
Remember: You must use the RSP Index .
Remember: Use the log of the price– then do your calculation–this is a more precise mathematical technique.
Remember: Subtracting the Logs of 2 numbers is the same a dividing the 2 numbers
BUT BUT BUT logs represent % change the BEST!
On Moving averages:
What is the BEST length of a Moving average? Simple or EMA
My answer:
If the historical price data looks like a S curve-
1)You want your EMA to track parrell to this curve
2)You want to catch 70% to 80% of the move.
Using Monthly closing prices of the S&P500–both the 10 month and 12 month MA’s fullfill those requirements—see the dshort link above.