Monday, October 5, 2015
In today's issue, we'll show you what may be the most valuable picture you'll see all year.
The picture tells an important story about the stock market... And paying attention to it could have a HUGE impact on your net worth.
In fact, over the last 30 years, a simple strategy based on this picture would have beaten the pants off a conventional buy-and-hold strategy.
Before we get to the picture, though – and the strategy – we need to put it into context...
We need to explain the 200-day moving average.
A lot of professionals like to use the 200-day moving average to size up a market's long-term trend. It works by collecting an asset's closing prices from the past 200 days, then taking the average of those prices. This produces a chart line that "smooths out" market volatility.
In our DailyWealth Trader service in early August, we noted that the Dow Jones Industrial Average had just crossed below its 200-day moving average. Here's what the chart looked like back then...
The benchmark S&P 500 Index was right on the verge of crossing below its 200-day moving average, too...
We explained to our readers that this wasn't a reason to panic and sell everything. Stocks often cross above or below their moving averages and then quickly reverse, continuing with their prior trends. We were simply highlighting the market's potential to change its trend.
In the last month, we've seen that potential trend change take hold...
Not long after our August issue, the S&P 500 broke 11% lower in six trading days. As you can see in the chart below, this big drop led to a change in the direction of the 200-day moving average. It started to move lower about six weeks ago.
The key development isn't that the S&P 500 has crossed below its 200-day moving average. It's that the 200-day moving average itself has changed direction.
In the last 30 years, these direction changes have only happened 15 times. Some of these changes were insignificant... But others preceded huge bull and bear markets.
In the 30-year chart below, we've marked these 15 occasions. As we mentioned above, this could be one of the most valuable pictures you'll see all year.
Is this one of those insignificant changes in direction or one that precedes a huge bear market? We don't know. But we're certainly cautious.
After looking at these big moves, we figured investors would probably do well to buy stocks when the 200-day moving average is headed higher... and to get out of stocks when it's headed lower.
We ran the numbers and found that to be true. In order to weed out most of the insignificant changes, we only looked at shifts in direction that lasted at least one month.
The table below shows what would have happened if you had invested $10,000 in the S&P 500 30 years ago. Each time the 200-day moving average turned lower for at least a month, we got out of the market. And each time it turned higher for at least a month, we got back in.
As you can see, there was only one period when you ended up with a negative return... And it was only a 4.7% loss. Overall, you would have turned a $10,000 investment into $133,031... a 1,230% return.
If you had simply bought into the S&P 500 Index and held on to stocks during the entire 30 years, your $10,000 would have grown to $104,353... a 944% gain.
In other words, the buy-and-sell strategy outperformed the buy-and-hold strategy by nearly 287 percentage points. You would have made an extra $28,678 after 30 years.
Not only that... But you would have missed out on the worst part of two brutal bear markets, in the early 2000s and late 2000s. The table below shows what happened to the S&P 500 in all the periods we were out of stocks.
Avoiding stocks during these times wasn't always the right move... But on average, it was. Plus, it would have freed up your cash to pursue other opportunities.
What do you do with this information?
We don't recommend selling all of your stocks today. We consider this a guide for our investing behavior...
We suggest easing up on new stock purchases. Confine your buys to great businesses trading at good prices... And look to make money in areas that have already been crushed, like gold, oil, and other commodities.
We see this trend change as significant. We'll keep you updated with any changes.
Brian Hunt and Ben Morris
"If the S&P 500 falls 20% in the next year, how will your stock holdings perform?" Brian and Ben write. "If the S&P 500 climbs 20% in the next year, how will your stock holdings perform?" Thankfully, there's a stock market strategy that allows you to make good money in either of these outcomes. You can learn all about it right here.
Brian and Ben say one of the simplest – and most important – ideas in all of investing is asset allocation. "It could save you hundreds of thousands of dollars over the course of your life," they write. Get all the details here.
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