“Bull Market or Dead Cat Bounce?”

DEAD CAT BOUNCE:  A term on Wall Street that refers to a temporary rally within a declining stock market.
THE TECHNICAL DEATH CROSS OF THE STOCK MARKET:  A term that describes an early warning of a downtrend when the market’s 50-day moving average crosses below the market’s 200-day moving average.

After the long Labor Day weekend holiday, I suspect the action on Wall Street will start to pick up, and the large fluctuations in the markets will continue.   I am asked daily about these stock market fluctuations.  Is it time to buy?  Should I be selling?  How do you short the market?  How about gold? What about bonds?  The list is endless, and the opinions on Wall Street are endless.  Grady….WHERE ARE WE and where are we going?

These questions are the toughest for any wealth advisor to answer.  The next 6 weeks are going to shape our investment policy and philosophy for the next months and possibly years.  One manages money differently when the market is in a confirmed downtrend vs. a confirmed uptrend.  We will know soon which trend it is.  The following are points that need to be considered for long term investors:

Currently, the 50-day moving average is below the 200-day moving average (what technicians call the “death cross”).  The last time this happened was in 2008.  The market return was -39% in 2008.  During 2008 a severe correction came in September lasting through the month of October.  This does not mean it will again happen this Fall.  However, we have noticed some similar technical conditions.  It’s a time be cautious.

Multiple 200-point fluctuations both up and down do not signify a healthy market.

Historically, stocks face their biggest challenges after Labor Day into the end of October.

We have an election around the corner.  This election favors more tension in our society, and potentially the market.

This cross does NOT confirm that we are in a downtrend, but we have to have a significant rally and soon, for the downtrend not to be confirmed.  Our charts and technical indicators are still pointing down, so it is not time to buy; it is a time for caution.

2007-2009 was the most difficult time investors have ever faced in our lifetime.  You have to ask the question, What did I learn as an investor?  What did my wealth advisor learn?  Did my habits as an investor change?  Did my advisor change?

The most common mistake investors make is doing the same thing over and over.  They typically fail to remember lessons of the past.  We all have short memories.  I am sure some of you can remember when the NASDAQ was at 5000 in 2000 (today it is at 2188).  If you were offered a bond fund in 1999, you would have thought your advisor was crazy, even though there were many signs of a pending correction. That bond fund would have vastly outperformed the market during the correction that occurred from 2000-2003.

I personally would enjoy a stock market like the 90’s.  I wouldn’t mind 2003-2007.  But until market and economic conditions change, and our research and studies are showing that they have not, it is not here yet; be patient.  I know Cramer has said “the lows are in for the year” (August 2010), but I also know in August 2008 Cramer was advising “great time to buy stocks for a long term investment”.  If our outlook changes, we will be quick to act.  We have included some charts to help illustrate the above conditions we now face.

The 50 and the 200 day moving averages are the average price of the stock market for the preceding number of days.  The 50 day moving average is shorter term and is the average price of the market index for the last 50 days; while the 200 is longer term.  When stocks cross below the 200 day moving average, and the the 50 day moving average itself crosses below the 200 day moving average, the long tern trend in the market is down. The first chart below shows the current S&P 500 Chart, while the bottom chart shows the last long term down trend in the market in 2008.