The recent slump in the market occurred rapidly and indicates oversold conditions. My preferred method of monitoring — and acting on changes in — momentum in the market is the Stock Market Momentum Indicator (SMMI), as constructed and calculated by CRB. I had been anticipating a signal and it finally appeared after yesterday’s close.
The last time this indicator flashed a buy signal was on August 31 of last year. I wrote about the signal at the time and gave my reasons for taking action cautiously. In short, the market was still near peak levels, a credit crunch was starting and the economy seemed to be heading towards a recession. The caution was warranted, as the signal, which closed on May 29, turned out to be the only unprofitable such signal since the indicator’s inception in 1994.
No disclaimer this time
I am much more optimistic that acting on this signal will yield profits. The difference this time around is that the market has taken a severe beating and sentiment is currently very low. The S&P 500 is far below last year’s peak and still only 4% above the low set on July 15.
My optimism is confined to the short-to-medium-term. I am viewing this strictly as a bear market rally and that is how I will play it. In forming expectations about this trade I look at typical results from previous SMMI buy signals – 7.0% gains over 112 days. Another yardstick to look at is previous bear market rally history. Of course they are not all the same, but a rule of thumb is that they retract two thirds of losses from the most recent peak. Retracting two thirds of the drop from 1,426.63 (on May 19) to 1,214.91 (on July 15) would put the S&P 500 at 1,356.06. That is 7.4% above Tuesday’s close.
A sensible way to play this bear market rally is to take a long position now and to close it when the indicator flashes a sell signal. My intention is to do just that, as well as sell some other stocks when the rally runs out of steam. That way I will have enough dry powder to take advantage of even better buying opportunities that I expect to materialize next year.
August 4, 2008 at 1:09 am |
I very much appreciate this blog. Great info not I’ve not seen anywhere else.
Thanks!!
August 5, 2008 at 5:40 pm |
Thank you for your kind words. I hope you keep visiting the site and that my writing is of some use to you.
August 5, 2008 at 5:46 pm |
For those of us too lazy to follow the SMMI, will you keep us posted when the sell signal appears?
August 5, 2008 at 5:55 pm |
The morning after the sell signal appears, I will write about it, perhaps along with some tips on how to play the bear.
August 7, 2008 at 8:32 pm |
Markets showing plenty to 2 way volatility, with high volume on either side, the loose patterns are not too encouraging for the bear market bulls, just wondering if your SMMI indicators show up anything insightful.Thanks for the blog Arnbjorn.
June 19, 2009 at 12:00 am |
[...] a foul trade from last year On July 30 of last year, I recommended taking a long position in the market as I considered it oversold on a short-term basis (using the CRB Stock Market Momentum Indicator) [...]