On Friday, the focus of investors was on the inability of Congress and the White House to come to an agreement on the debt ceiling, and the markets plunged to the biggest weekly decline in a year.
From a technical standpoint, the most widely followed broad market index, the S&P 500, managed to hold at the important 200-day moving average at 1,285, and that is good news. And at the time of this writing, a deal appears to be in the works between the major parties, but the success of the politicians to gain the necessary votes is uncertain, and the failure to pass an acceptable arrangement could have an impact on the direction of the market early this week.
Those who have followed the Daily Trader’s Alert are familiar with the long-term chart (monthly) of the S&P 500 and its 12-month simple moving average (red line). For over 10 years, investors who sold when the price line crossed below the 12-month moving average and bought when it crossed above it have enjoyed a better-than-average return.
There are no guarantees that this system will remain an accurate trend predictor, and no single system should be relied on to make major investment decisions. But this chart above is currently telling us to hold investment-grade stocks and buy on dips. However, if the price line crosses under the 12-month moving average (now at 1,256), this system would tell us to sell stocks and go to a 100% defensive investment posture.
I noted last week that “Fear has finally entered the market as measured by the CBOE Volatility Index (VIX) and two recent gaps up.” These gaps often represent periods of high emotional stress among investors and sometimes provide great opportunities for those who are patient and have the resources and strength of conviction to go against the crowd of sellers.
If Congress is unable to reach an agreement before Tuesday, I believe that we could enter a period during which the fear gauge will rise to 40 or higher. In 45 years of providing investment advice, I have never heard so much talk of gloom and doom from the press. They are totally focused on the issues which will eventually have no bearing on the earnings of America’s best companies.
It is time for rational thinkers to “keep your head when all about you are losing theirs.” (Kipling).
- See Serge Berger’s Daily Market Outlook: Why You May Want to Wait to Go Long
- See Sam Collins’ Trade of the Day: A Safe ETF With a 5%-Plus Yield
- See Serge Berger’s Trade of the Day: Regal Entertainment Stock Could Be a Hit