Tuesday, February 2, 2016

Uh oh, this market just crossed the streams again!

You may remember this scene from the classic ‘80s movie “Ghostbusters”, where Harold Ramis's character reminds the others that they need to be cautious and never “cross the streams.”

Well in the U.S. stock market, the streams have also been getting crossed, and it just happened again today, and you're probably seeing a "protonic reversal" on your 401k. These “streams” involve the 50 and 100-day moving averages of the DOW Jones Industrial Average, and it’s been an uncanny predictor of when the market will dive and stay down over the last 6+ months.

On July 20, the Dow was in great shape, at around 18,100, and the 50 and 100-day simple moving averages were just below that, with the 50-day average slightly above the 100-day average. But both the 50 and 100-day moving averages were starting to level off of their multi-year winning streak, and if anything were trending slightly down. So one week later, when the market had dumped 660 points, both moving averages turned downwards, and the 50-day dove below the 100-day average, “crossing the streams” for the first time.

The DOW muddled in a tight range for the next 3 weeks, but never got back to the (now slipping) 50 and 100-day moving averages. Then on August 17, the oil glut and other concerns led to full-blast selling, and nearly 900 points were shed in 8 days. However, the DOW recovered from there in succeeding 2 ½ months, getting back above 17,900 at the start of November, and on the surface, it seemed the market’s troubles had passed.

But take a look at the steadier, less volatile red line on the chart, which signifies the 100-day moving average.

It never stopped declining in that time period, and dropped from nearly 18,000 in late July to 17,200. And it’s noteworthy that all peaks that the DOW would hit in December were still lower than the 17,900 it was at in early November, so when the 100-day average finally started to (barely) trend up around Christmas, the DOW wasn’t that high above it. Sure, the 50-day average bounced back with the runup in Fall, but it wasn’t able to get back to its prior levels, sitting at 17,611 on December 29, as the market closed on December 29 with the DOW was at 17,720.98.

In the next 3 weeks, the DOW blew off another 2,000 points as the global economy and oil markets started declining further, which seems to have helped to “over-strengthen” the dollar and constrain potential US growth in the process. The 50-day average has dropped in kind, especially with the market staying at these lowered levels in 2016, and today it went back under the 100-day average, with both ending the day within a few points of 17,060- more than 900 points below where the streams were first crossed in July.

If you believe in trading based on charts and momentum (as opposed to, you know, the actual economy and other real-world stuff), this would indicate that there’s a “lid” to the stock market that sits about 5% above where it is now. And with both the 50 and 100-day averages on pace to stay in decline for the near future, with U.S. growth slow and no real spark to jump out of it, there is no reason to believe there will be a stock market recovery before the snow’s gone, if not well after it.

Not that I should be taken as any kind of a stock picker (quite the contrary, I suck at this "investing" side of legalized gambling), but the charts and the numbers are showing some interesting trends these days. Especially with the streams getting crossed again today.

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