Stock Phase , Updated October  10, 2009

For the S&P500 at 1071, the market is above the  200 day moving average at 904. As of March 2009, the S&P500 has bounced off the lows at 666. We see a phase 1-2 base forming at this time.  Investors should be prepared to move into the market if a re-test of the 200 day moving average (MA) turns into support. The current market is developing into a longer term buy, but traders should wait for a correction as the March-September 2009 rally could be loosing steam. At this point in time, we are concerned the volumes of these rallies are not indicating a bull market - even if we are trading above the 200 day MA.  

The S&P500 ( chart ) should be viewed on a 3 year weekly graph. Presently we are above the 200 day MA or phase2. We could see a new bull market ( phase2 ) emerge if a re-test of the 200 day MA holds and some additional buying volume enters the market.

 Going back to the start of 2008, the 200 day MA just started to turn down. In our simple StockPhase image, the first wave (2,3,4,1,2)  is the stocks' price. The second wave is the 200 day MA (1,2,3,1) . When we see the market drop and fall below the 200 day MA, a bearish market is forming ( December 2008 ). Our readers were well informed of this bearish development last January 2008.

Phase 4 - caution

Investors buying on the dips early in stage4 could end up holding large losses in 6-12+ months as the market drops. Never go "long" and buy a stock/ETF in a phase 4, wait for a bottom to form and buy as the stock moves above the 200 day MA. Expect to miss the first rally off the bottom.

Stock Phase

Defining the Market

Who benefits the most

Phase 1

Base of the Market

Investors with 3- 5 year time horizons. Picking bottom is impossible. Fundamentals are improving. Traders continue to catch fast moves up or down.

Phase 2

Rising Market

Investors and Traders. Traders are looking for short term moves. Investors on the sidelines are moving into the market.

Phase 3

Topping or the Cycle Peak

Traders are watching a top form and moving into short term positions. 
Investors should exit positions if the 200 day moving average is broken. This applies to any stock, ETF, or Exchange.

Phase 4

Falling Market

Traders, in "Short" positions or inverse ETF's. Investors
stay in bearish positions or 50-90% cash.

 

      
      Emotions at each Stage of the Market

The Top of the Market or the transition from Phase 3 to Phase 4 is often characterized by a long expansion phase. The media will tend to discount bad news and the market is feeling good. The market has stopped rising and a top is forming. As profits are cashed in by some investors the greed in others takes over and extreme swings are visible. A sideways trading range will develop. New 52 week stock highs are common.

The fast move lower in Phase 4 is a result of technical trend lines being broken and lower earnings forecasts. The move down tends to look like stairs, dropping with consolidation formations. It is noticeable that 80% of the news coverage are stocks - for the long position ( Investing ). Very few stock pickers will come on the market reports and mention the top pick for the week is a short position.  Yet when the market drops, 95% of the market forecasters mention we may have a few more days till we see the bottom of the market - still picking long term stocks. One theory is a stock analyst announcing an outright "short sell" on a billion dollar company could be black listed from investment banking deals. It is easier to be politically correct and stay clear of "sell" or "short" recommendations. 

At the final bottoming stages of the market, fear finally grows and a market capitulation takes hold. News and media reports often have end of the world situations. The market will start to rise 6 months before all of the bad news is released to the public. With fear gripping the markets, few analysts will make buy recommendations fearing their clients will take bigger losses. Stock brokers are not very popular at this stage.

It would be wise to turn down the TV volume and watch the charts for a reversal. Ask yourself one question, "why would the smartest traders/investors read teleprompters on TV for a living". The media has no idea where the top or bottom of a market is. Technical analysis does not need discussion, it's a mathematical model.		    
           
      10 years of the S&P 500 January 1999 to Jan 02, 2009, The 30 week moving average or 200 day moving average is graphed on the weekly S&P500. The bear and bull markets are trending above or below the moving average. Into 2009, a bull market would emerge as the 200 day moving average is crossed. It's going to be months before the 200 dayMA turns up.    


     
           
             
           
           
           
           
         

 

     

 
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