It is easy to get bogged down in the daily, hourly, or even minute-by-minute scribbles the market makes. All those scribbles, the news, all the chatter of pundits, etc. may cause one to forget the general trend of the market and to keep the bigger picture in mind. The latter is very important, as most of you know that investing for the longer term (months to a few years) is where the real money is made. Just ask Warren Buffet (I had to mention him, since he’s been much in the news lately due to his 50th annual news letter to shareholders this past weekend: http://www.berkshirehathaway.com/letters/2014ltr.pdf.) Oh, and please look at those overall gains since 1964 on the first page to see what I mean… That said, how can we tune out the noise to determine which way the market is headed longer term? Use moving averages. Simple look at moving averages (MA), which way they point (up or down) and how different moving averages are related to each other to get an idea of the markets’ trends; both long term and short to intermediate term.
I.I. is staying with the KISS-principle, as it is rather lucrative and gives peace of mind, and the first chart shows the S&P500 without price. Yep, no price: the daily noise is tuned out. Instead, only MAs of different time frames are plotted. The longest/slowest MA is -in this case- at the bottom (the thick line), and all subsequent shorter/faster MA are above with the shortest/fastest MA -in this case- on top. What is obvious is that all MAs are pointing up, from fastest to slowest, and the fastest MA is on top, while the slowest MA is at the bottom. This tells us 2 things: the trend is up and remains up. Bull market.
CLICK CHART TO ENLARGE
Not convinced this works!? Let’s take a look at the same time frame for the market in 2008 into early-2009: the infamous market crash. This caused the total reverse of the first chart: the slowest MA is on top, the fastest below: bear market. See figure below. Rather striking isn’t it? So you if you want to invest for the long-term and don’t want to be bothered with the daily scribbles, charts like this can make your life easier. Of course the recent October correction may have even caused the most inert investor/trader to become sweaty around the palms, but it actually didn’t even make a dent in the chart above. Not until these MAs start to flip position relative to each other should the long term investor become defensive. KISS. 🙂