Global stock market moving averages hit full house

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I often refer in my posts to the use of moving averages as indicators of the stocks market’s secondary and primary trends. Although not stand-alone indicators, the moving average lines add a certain discipline to the investment decision-making process when used in conjunction with other fundamental and technical measures.

Just to recap: The 50-day moving average is an indicator of the secondary trend. However, the longer-term 200-day moving average is of more importance as an indicator of the primary trend. Although it is a lagging indicator by construction, it fulfils a useful role in keeping investors on the right side of the long-term trend.

It is important to note that three conditions must be met in order to call an equity bull market, namely (1) the index in question must penetrate the 200-day average, (2) the 50-day average must cross the 200-day line, and (3) the 200-day average must turn upwards.

Following the surge in global stock markets since the March 9 lows – and earlier lows in the case of a number of emerging markets – one after the other has started fulfilling the above conditions. This is fodder for the bull argument, especially when considering the following:

(1)   The benchmark indices of every single mature and emerging market that I monitor are above both the 50- and 200-day averages, as can be seen in the two graphs below (only the 200-day lines are shown).

percentage-of-develop-markets-above-200-day-moving-averages-pic-11

Source: Plexus Asset Management

percentage-of-emerging-markets-above-200-day-pic21

Source: Plexus Asset Management

(2)   The 50-day lines are in all instances above the 200-day lines.

(3)   The 200-day averages have turned up in all instances with the exception of the Athens Composite Index and the Karachi 100 Index.

But also bear in mind that some of the movements have been quite extreme when weighing up the following:

As far as mature markets are concerned, 76% are trading more than two standard deviations above their 50-day averages and 56% more than two standard deviations above their 200-day lines.

Among emerging markets, 59% are trading more than two standard deviations above their 50-day averages and 68% more than two standard deviations above their 200-day lines.

Interestingly, the Wellington NZSZ 50 Index is trading more than three standard deviations above its 200-day line and the Istanbul Index likewise its 50-day line.

Although these figures support the bullish case, they also argue that some degree of reversion to mean looks overdue. This could take the form of either a pullback or a consolidation (i.e. ranging) pattern. Caution seems to be in order.

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1 comment to Global stock market moving averages hit full house

  • Frank W

    I currently lean towards the belief that all these market measures are more or less irrelevant to which way the market is headed and will probably continue to do so as long as the market is in bear market rally mode. I mean, if the market does not care that company profits have slipped 98% from the late 2007 peak and are projected to go negative next quarter, that unemployment is headed for 11% or more, that housing is locked in long-term downtrend, that the big banks are loaded to the gills with toxic mortgage garbage, that recessions caused by financial crises go on for years, etc., then why should the market care about abstract metrics. By the way, I came to the conclusion that the upswing must be due to traders and other speculators playing the major indices, because of the wide market breadth, but low and rapidly declining volume. However, someone did a study and concluded that the buying is principally being done by institutions. Therefore, I now think that we are seeing the results of efforts of permabulls like Jeremy Siegel — it is always a good time to buy — or know-nothings like Jeremy Grantham, the latter buying on a big dip without having any idea whether the market has bottomed or not and not really caring. This rally is not an intellectual one and I doubt anyone is going to discern the top by using their brains and skills, because the market is neither brainy nor skillful.

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