Why the May 31 Close is Pivotal To Determine Primary Trend's Direction
Way back in 1988, Robert W. Colby and Thomas A. Meyers authored a classic technical analysis book entitled Encyclopedia of Technical Market Indicators, in which they back-tested the performance of hundreds of market indicators. What caught my eye was their work on 12-month moving average (MA) crossovers, which offered the best returns of any time going back to the early part of the 20th century. Of course, it's subject to whipsaws like any time. However, I have always had a healthy respect for that specific average, since it is "seasonally adjusted" and can be used as a quick test for identifying the direction of the prevailing primary trend.
While this generally performs better than other timespans, it is very important to recognize that it is only one indicator in the technical arsenal and should be used as a weight of the evidence approach. Studying these multi-month trends may not appear relevant to most traders with a two- or three-week perspective, but it really is. That's because pro-trend rallies and reactions are more powerful than their contra-trend counterparts and are much easier to play.
A 45-Year History of 12-Month MA Crossovers
Chart 1 compares the S&P Composite to its 12-month MA and a Percentage Price Oscillator (PPO) using the six and 15-month parameters. The red arrows approximate decisive negative 12-month MA crossovers, followed by a primary bear market. The green ellipses also flag negative crossovers; however, they turned out to be false negatives. None, except the red ellipse in 1969, occurred under the context of a primary bull market. Finally, the red vertical lines flag oscillator negative zero crossovers. Most signals are timely, whilst others, such as 1962, are unforgivably late. Note that all of the green ellipses appear when the PPO is in positive territory.
Chart 2 brings us forward 20 years to the secular bull market covering the 1980–2000 period. As a result, only three ellipses were signaling false negatives. Two positive re-crosses were followed by a worthwhile move, and one in 1990 by a rally, but, in all honesty, it was a failure. Once again, a characteristic of all three ellipses is that they developed when the PPO was positive.
At the end of the 1969–2000 period, six green whipsaws were followed by worthwhile bull moves, and two by anemic rallies.
Chart 3 focuses on the period since 2000. One takeaway is that once a negative MA crossover had taken place under the context of a bear market, no upside whipsaws followed until the subsequent bull market was well underway. That was also true for eight of the nine bear markets between 1960 and 2000. By the same token, the negative MA crossovers in the ellipses were only in force for a few months or less, and the re-crosses were all followed by worthwhile moves.
Final Thoughts
The moral of the story is, firstly, that a decisive negative 12-month MA, unless quickly reversed within a month or two, invariably signals a primary bear market. Second, if a decisive negative crossover is reversed within a month or two, the odds favor a bull market that is still alive and kicking.
Chart 4 tells us that the S&P 500 dropped below its MA in March. That crossover became more decisive in April. However, "Sell in May" has not worked out so far this year, as the S&P has re-crossed its MA. With five trading days left to go until the end of the month, it looks like a re-confirmation of the bull market is taking place. However, it's not May 31 yet, and its ability to remain above the average at around 5,750 is still open to question. If it cannot, the odds of a primary bear market will have increased.
Good luck and good charting,
Martin J. Pring
The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Groupof Walnut Creek or its affiliates.
