Don't Panic

In my studies about financial markets, I've learned many things, and here is one of the most important ones. The greatest buying opportunities are when everyone else is so fearful that they sell everything and leave the market. We are starting to see that happen now, and I wouldn't be surprised to see the markets start to rebound in a significant way over the next 12 months, and possibly sooner, though I'm not going to make predictions. It might take longer to happen, but I'll be able to tell when it does.

There is an easy way to know when the market is officially going down and when it is officially going up. That is to watch the 20 week moving average and the 40 week moving average on a stock chart of a major market index, like the S&P 500 or the NYSE. When the 20 week average is above the 40 week average, the market is going up. When the 20 week average is below the 40 week average, the market is going down.

Want to see? Go to the following link for the S&P 500 and set the parameters I specify below.

http://bigcharts.marketwatch.com/advchart/frames/frames.asp?symb=SPX

Under the Time Frame area:
Time: 1 Decade
Frequency: Weekly
Under the Indicators area:
Moving Averages: EMA (2-Line) and the next box 20,40 to set it to 20 and 40 weeks

Those are the critical settings. I set other things like the Price Display (under Chart Style) to be Candlestick, but that's not really important. Click the Draw Chart button, and you should end up seeing something like the following, without the circles that I added.



I didn't include the dates in this picture, but you can find them at the bottom of the page when you go to the link. If you look closely, or click on the picture, you can see a brownish line and a blue line. The brown one is the 20 week moving average, and the blue one is the 40 week moving average.

The circles are when the 20 week went from above the 40 week to below (in the last few months of 2000), then from below to above (in the first few months of 2003), then again from above to below (at the very end of 2007). You'll notice that the general trend of the market is up when the brown line is above the blue, and it is down when the brown line is below the blue.

A simple way to use this information is to invest your money in the index you are tracking when the 20 week moving average moves from below the 40 week moving average to above it, then leave it invested there until the 20 week moving average moves below the 40 week moving average. At that point, you take your money out of the index and put it into CDs or bonds or something more stable until you see the 20 week moving average move above the 40 week moving average again.

So, don't panic. This might be close to the bottom, or it might not be there just yet, but the chances are pretty good that we are closer to the bottom than to the top, so if you don't need the money you have in stocks for the next few years, it might be better to hold on to them and wait for the market to go back up than to sell out this far from the top. It can be scary, and it could take a year or more to turn around, but if you have that much time, consider your options. Use the 20 week and 40 week moving averages, and you can know for sure when the index you are tracking is officially moving up again.