OVERSOLD MARKET BOUNCES ON LOW VOLUME -- THE VALUE OF THE 50-DAY AVERAGE FOR MARKET TIMING
TREND IS STILL DOWN TO FLAT... After a weak start, the Dow (and the other major stock indexes) closed higher today. The Dow gained 55 points. Breadth was positive, but volume was light. On a short-term basis, the Dow has also reached an oversold condition. The 9-day RSI oscillator along the top is showing minor "positive divergence" near the 30 line. That's usually a precursor to a short-term bounce. The 14-day stochastic lines (below the chart) have been oversold for two weeks -- and haven't been very helpful. A crossing back over 20 is needed to signal a short-term bottom. Finally, the MACD lines are still negative. They need to turn positive to improve the short-term picture. As a result, the short-term trend is still down. The market trend since last summer, however, is sideways. Today's intermarket picture was also positive for stocks. Bond prices retreated. Oil prices fell back below their recent breakout point at $35. The dollar hit a hit a seven-week high against the yen. That pushed gold prices into a $6.00 loss. Gold stocks lost 4% and, more ominously, the XAU Index fell under its 50-day average.
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WHY WE USE A 50-DAY AVERAGE... We show a (red) 200-day moving average on our daily charts and a (blue) 50-day average. While the 200-day line is used to determine the major market trend, the 50-day line is used more for trading (timing) purposes. That's why over the past couple of months we've consistently warned about any stock index, group index, or stock that fell under its 50-day line. Chart 1 shows the Dow closing decisively below its blue 50-day line on January 21 at 8442. That's 522 points over today's closing price. We've been on the defensive ever since then. It's a simple timing tool, but it works. Chart 2 shows the Nasdaq with a simple 50-day average for the past year. It's pretty clear that a "buy and hold" strategy didn't work. The simple technique of selling under the 50-day average wasn't perfect, but it saved an awful lot of money.
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SOME STATISTICS ON THE 50-DAY AVERAGE... They say you can't time the market. Not according to our statistics. In the 30 years from 1972 to 2002 a "buy and hold" strategy reaped a gain of +1,105% in the Nasdaq market. A simple timing strategy of selling whenever the Nasdaq fell under its 50-day average (and re-entering when it rose back above it) reaped a profit of 13,794%. In the ten years from 1993 to 2002, a "buy and hold" strategy yielded a Nasdaq profit of 93%. By utilizing the "sell discipline" of the 50-day average, that Nasdaq profit jumped to 280%. That's why we keep such a close eye on it and show it to you on all of our charts. The 50-day line is also one of the technical tools we employ at MurphyMorris Money Management to keep us on the right side of market trends. It's proven very useful lately.
MONEY MANAGEMENT UPDATE: USING A SHORT FUND AS A HEDGE... At MurphyMorris Money Managemet Co, we often use a "short fund" to protect existing long positions in our managed accouts. Since December, we've owned the ProFunds Short Small Cap Investment Fund --shown in the chart below. The fund started to move up in early December -- and crossed over its 50-day average in mid-January. At the moment, about half of our invested capital is "short" the market and the other half is "long". In other words, we're in a neutral posture. While it hasn't made us much money so far this year, it has kept us from losing any. Through last evening, the S&P 500 was down 5% for 2003. By comparison, our growth accounts are up 1.8% and our moderate accounts are up +0.4%. [Our conservative accounts have remained in money market funds and are about even for the year]. We're content with that. There are times to make money -- and times to keep it. Our goal is to make sure that we "keep" it when the market is volatile (like now) so that we'll still have it to "make money" when the time is right.
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