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S&P 500 Index: 50-day Moving Avg Crosses 200-Day

spx-2009-06-24-2

Well, its a pretty big day in the market. You can see that on the far right side of the graph the 50-day moving average has crossed back above the 200 day moving average. This is the first time since late 2007 that the 50-day is above the 200-day and that brings into question why is it important.

Historically, investors have believed that if the 50-day is above the 200-day moving average, this is a bull market buy signal. Once people start to notice this, they will generally put money into the market believing that they are in on the beginning of a new bull market ahead of the crowd. The 200-day moving average, instead of being overhead resistance to rising prices turns into support against falling prices.

Anecdotally, in my years of investing and watching this sort of thing, I believe that as long as the 200-day moving average is falling, you do not have a new bull market. We certainly could be in for a continuation of the rally, but a falling 200-day moving average line is weak support at best. Granted, having the 50 above the 200 is better than the flip side, until the 200 starts rising along with the 50, the intermediate term trend for the market is still down.

As we move into month-end/quarter-end, it is common to see the markets rally as fund managers make trades to own the hottest stocks for their client reports. My best hypothesis is that we get additional days of the 50 line increasing its upward movement above the 200 line. After that, we’ll have to reevaluate.

Some of our stop losses have hit (GE and Caterpillar) and some of our stink bid buys have hit (Bank of America and Monsanto).

I think that:

1. as long as the Fed keeps monetary policy easy, the stock market will have an over-riding macroeconomic stimulus that will keep a floor under stock prices and keep them moving in a recovery direction (albeit with some painful sell-offs and corrections within this bear market rally); and

2. with all of the money on the sidelines from money managers that did not invest in early March when we did, we have people ready to “buy the dips” that will help sustain the bear market rally up to the 1050 level on the S&P 500 Index (see my earlier posts with the chart showing and explaining this level).

dynamic-yield-curve

The chart above comes from my favorite charting website to which I subscribe: StockCharts. They drew this chart with a skateboarder on it to illustrate the steep nature of the current yield curve which indicates that the Fed is being quite stimulative. I thought it might help to give you a visual on point 1 above.

Mark