Global stock market moving averages hit full house
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August 5th, 2009 by Prieur du Plessis, Investment Postcards from Cape Town
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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).
Source: Plexus Asset Management
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.
Dr. Prieur du Plessis is an investment professional with 26 years' experience in investment research and portfolio management. More than 1,200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns, including his blog, Investment Postcards from Cape Town. He has also published a book, Financial Basics: Investment. Prieur is Chairman and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and a number of foreign countries. He also serves as Honorary Consul of Slovenia for South Africa, actively developing economic, cultural and scientific relations between Slovenia and South Africa. Prieur is 54 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His leisure activities include long-distance running, traveling, reading, motor-cycling and scripophily. Read more from the author/contributor here.
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