How Moving Averages Are Used In Retirement Investing

Moving averages tell us a lot about the stock market, and they’re saying something interesting now.

Investors often use moving averages to assess market momentum. A simple moving average is an average of the investment’s closing price over the specified period.

To determine the 200-day moving average of the S&P 500, you add the closing value of the index for each of the last 200 trading days and divide the total by 200. Some investors prefer the exponential moving average, which adjusts the computation to give greater weight to recent periods.

More details about computing moving averages can be found here.

Usually a chart is created with one line showing the price of an investment over time and another line showing the moving average over time. I bring up moving averages because there were important recent developments.

In general, the momentum for an investment is negative when, on the moving average chart, the line of the investment’s price is below the moving average line. Momentum is positive when the price line is above the moving average.

Some traders use a short-term moving average, such as the 50-day moving average, but that is very volatile. The price line regularly moves above and below the moving average line. If you trade in and out of an investment using the short-term moving average, there will be periods when you’ll make a lot of trades without earning gains. That’s known as churning.

The longer-term 200-day and 300-day moving averages are more reliable in determining whether there has been a lasting change in the trend.

Recently, the values of the major stock market indexes fell below their 200-day and 300-day moving averages. That’s a clear sign that there’s negative momentum in the markets.

Another factor to examine is whether the line of the moving average is sloping up or down. If it’s sloping down, then the negative trend is more firmly established.

The November downturns in the major U.S. stock indexes brought the price lines below the longer-term moving average lines and also caused the moving average lines to slope downward for the first time in a couple of years.

Even so, you shouldn’t use moving averages alone to make investment decisions.

Momentum can change quickly, as we’ve seen the last few months when the picture changed from very positive to the current negative one. Currently, the price lines aren’t far below the moving average lines. It wouldn’t take much of a reversal for the price lines to return above the moving average lines.

Also, much of the market has been doing better than the indexes.

As of last Friday, half of the industry groups in the S&P 500 were above their 200-day moving averages, even after the October and November declines. Two-thirds of industry groups now were above their 50-day moving averages, perhaps indicating a change of momentum not yet captured by the longer-term moving averages.

Also, in the last few weeks the number of stocks making new lows has decreased and the net percentage of stocks hitting new highs has increased.

These often are early signs of the end of a correction.

None of these indicators are 100% reliable. That’s why I recommend looking at a range of factors to make investment decisions and not to arrange your portfolio so that it depends on one outcome in the markets.

These days market momentum is most likely to be influenced by monetary policy and trade conflicts. Those two factors have been driving markets down the last few months. Right now, markets are betting that’s going to continue. A change in one or both of those factors could reverse market direction. But as I said in the December issue of Retirement Watch, this is a good time for investors to be cautious.

The Data

The economy is looker stronger, at least in the Chicago area. The Chicago PMI shot up to 66.4 from 58.4. Most components of the survey shot higher. But this is a small sample survey that can be very volatile. We can’t draw conclusions from it until other data agree with it.

The PMI Manufacturing Index says there’s still strong growth in the sector. The index declined slightly to 55.3 from 55.7. New orders hit a six-month high, and exports hit a nine-month high. There are rising backlogs and other factors that indicate capacity constraints.

The ISM Manufacturing Index, on the other hand, says there’s a new surge in growth. The index rose to 59.3 from 57.7. Analysts expected a slight decline. New orders and backlogs both surged. This survey has been stronger than the others for some time.

The ADP Employment Report said 179,000 new private sector jobs were created in the last month. That’s in line with expectations but lower than the 225,000+ jobs created each of the two previous months.

New unemployment claims declined by 4,000. Analysts were expecting a larger decline. The four-week average is rising because of increases the last few weeks.

The Markets

The S&P 500 declined another 1.58% for the week ended with Wednesday’s close. The Dow Jones Industrial Average fell 1.23%. The Russell 2000 tumbled 3.10%. The All-Country World Index lost 1.66%, while emerging market equities decreased 1.11%.

Long-term treasuries added 3.18% for the week. Investment-grade bonds rose 0.04%. Treasury Inflation-Protected Securities (TIPS) increased 1.10% but high-yield bonds lost 0.11%.

On the currency front, the dollar rose 0.08%.

Energy-based commodities added 2.86% for the week. Broader-based commodities increased 1.31%. Among precious metals, Gold rose 1.45%.

Bob’s News & Updates

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