King Report: Who Cares About Moving Averages?

>

There is mucho pontificating by research types and pundits that ‘all is still well because the S&P 500 held its 200-day moving average. These people are wrong and misguided.

Long-time readers know that we regularly assert that the slope of the moving average is of paramount importance and breaches that are contra to the moving average trend carry no significance unless it is a monumental breach that will soon change the moving average trend.

Our veteran readers also know that we price the 252-day or 50-week (yearly) moving average over the 200-day. We have also noted that research by Richard Dennis from almost 30 years ago shows that commodity trends are best described by the 350-day or 70-week moving average. Dennis’s legendary ‘Turtle’ system uses the 350-day moving average as a filter, or discipline, in initiating trades.

Major stocks indices on this rally rallied above downward sloping 200-day moving averages. But they did NOT rally above downward sloping 252-day or 350-day moving averages.

CHART

S&P 500 Index with 200-day, 252-day and 350-day moving averages – NB: Seven false breaches during the rally from mid-2002 to 2007.

It’s clear that the 200-day moving averages, especially breaches contra to its trend, are grossly over-rated events. Historical charts verify this notion.

~~~

A couple weeks ago we wrote that ‘The deflation trade is back in vogue.’ Subsequently we noted, and supplied affirming charts, that bonds were a buy while stocks and commodities are a sell. We surmised that markets see something economically ugly, as in the ‘green shoots’ are a hallucination.

Recent Credit Suisse research notes most of The Street is positioned against our advice:

(1) GDP: most clients are looking for a positive surprise on the back of inventory rebuild, and a number expect a quicker-than-normal bounce-back in employment: this is the first recession in which US employment has fallen a lot more than US GDP. We heard quite a lot of whispers of 3% to 5% Q3 US GDP growth (cf consensus Q3 GDP of just 0.5%)…
(2) Markets: The ‘sell on rally’ mentality of two months ago has turned into a ‘buy on dips’ one. Clients are focusing on positive earnings revisions (for the first time since September 2007), at a time when margins appear to have troughed at much higher levels than during previous recessions…
(3) Everyone is a dollar bear…owing to QE! – and that in spite of the fact that the UK, Switzerland and Sweden are doing more QE than the US.
(4) Inflation, inflation, inflation… Clients almost unanimously believe that they have to be positioned for inflation (by buying resources, debtors)…