If you’ve been massively befuddled by what’s going on in the stock market these days, are wondering where the heck we’re headed, and have had your fill of your 401(k) looking more like a yo-yo at the National Yo-Yo Championships rather than an investment account, the good news is that there really are some markers out there on which an investor can hang his hat. There are also sites now that you can trade your stocks with others, here is the link to full article. First things first. Here comes the standard disclaimer: I don’t give nor am I licensed to give investment advice so repeat that to yourself multiple times while reading this. Secondly, as you’ve heard ad nauseum during ads for investment companies, past history is no guarantee of future results. There’s a reason the SEC requires that little disclaimer: it’s true.
Having dispensed with those minor details, I will tell you that I’ve spent a good portion of my career in the investment banking and financial planning sectors and am one of those strange people who actually enjoy reading balance sheets and divining patterns in technical charts. I would recommend you to check out this website to gain more knowledge on trading.
So, with that in mind, according to the most reliable indicator out there that I’ve found, the closing price of the S&P 500 this Thursday (Sept. 1st) is a really big deal. Without getting too technical, one of the most accurate long-term indicators of the stock market’s direction is the mid-line of something called “Bollinger Bands” charted on a monthly basis (1st trading day of the month). Historical analysis shows that if the S&P 500 closes above that number, then 90% of the time (going back 20 years) the market continues to rise. If it closes below that number, 90% of the time the market closes lower the following 1st trading day of the month. The market can do whatever it wants to on a daily basis in-between those two days but history shows that on a more intermediate-term basis, the trend of the market will continue in the direction that was set on the first trading day of each month (in other words, it smooths out the day-to-day volatility of the market).
How does this work in reality? On August 1st, 2003, the S&P closed above that line at 974.50. It stayed above that line until January 1st, 2008 and when it broke back below it, the S&P was at 1378, a gain of 41.4% (or an annualized gain of 9.4%). It stayed below that line until November 1, 2009 when it closed at 1,095 a decline of 20.5% (or 10.7% annualized). It’s been above the line since then for a gain of 10.8% (or 5.9% annualized).
If you would’ve done nothing more for the last 20 years than bought a S&P 500 Index mutual fund every time it closed above this mid-line, and purchased an S&P Index mutual fund or Exchange Traded Fund that “shorts” the S&P 500 every time it had a monthly close below this midline, you would’ve averaged about a 10.6% return on your portfolio. (Ummm…just in case you’ve already forgotten to repeat the above disclaimer(s), I’ll remind you again that just because it’s happened in the past, doesn’t mean it will happen again in the future)
So….where’s the Bollinger Band midline on the S&P 500 right now? 1,205. Where did the S&P close yesterday (Tuesday, August 30)? 1,212.92. And if that’s not intriguing enough for you, the second most reliable indicator of where the S&P’s headed is something called the “20 month Exponential Moving Average” of the S&P 500 based on it’s monthly close. And where is that particular number at? Try 1,213.
What does this mean in plain English? It means that two of the most reliable indicators of where the markets are headed on an intermediate to long term are at critical junctures. If we close above 1205 (or 1213) it means that “technicians” (the rather substantial number of traders who employ technical analysis to make trading decisions) will conclude that we’re still in a bull market and will invest accordingly. If it closes below those levels, those same technicians will conclude that we have entered a long-term bear market and invest accordingly (if it closes in-between those two numbers, which the way this market has befuddled people for the last 4 months would be poetic justice, I’ll give you my two cents on that if Thursday’s close happens to be, well, between 1,205 and 1,213).
So, if you’ve been looking to make some long-term sense out of the insane volatility we’ve witnessed in the stock market during the month of August, you may just want to take make a mental note of where the S&P 500 closes on September 1st. Because I guarantee that a whole lot of folks who do this for a living will be doing so.