Last July, we showed this chart to illustrate the historical significance of times when the 50-day moving average (DMA) crossed through the 200 DMA for the S&P 500. At that time, the S&P 500's DMA crossed below the 200 DMA, generating a bearish 'Death Cross' signal. We made the point that, like any price momentum tool, this indicator gives false signals more than half the time. Its effectiveness is that false signals produce small losses whereas good signals have captured all significant trends. The last few months have neatly illustrated our point; an investor who used this signal as a risk management tool over the summer would likely have incurred small losses. We are happy to report that the "all clear" signal from this indicator - the 'Golden Cross' - occurred last Friday. The golden cross is given when the 50 DMA crosses above the 200 DMA.

For a long-term perspective on these technical signals, our chart illustrates periods where the S&P 500's 50 DMA has been above (light green fill) or below (red fill) the 200 DMA beginning in 1928. The 50 DMA crossover has done a good job of staying on the right side of longer term trends, in our view, but it is not the most timely indicator - for example, from the March 2009 low it did not signal 'buy' until late June, by which time the S&P 500 had already risen 31%.

David Fuller's view Fullermoney seldom relys on widely followed indicators, not least moving average (MA) crossovers which must lag market action by definition. We prefer to view MAs, particularly the 200-day, as trend smoothing devices which help to illustrate when the medium-term trend is becoming overextended - up or down - and subject to mean reversion towards the MA. (For more on this subject, including numerous examples, use the Search facility above under 'mean reversion'.)

The July low was one of this year's defining moments, when a few saw a buying opportunity and many others spoke of collapse. For examples of each, see Comment of the Day for Tuesday 6th July 2010, commencing with shrewd Mike Lenhoff's assessment for Brewin Dolphin Securities. Students of the markets or assessors of this service may find it interesting. However those who are not already subscribers will have to wait until 6th November when the Subscriber's Area copy is four months old and enters the public Archive.


Mike Lenhoff's comments were followed by an article from the New York Times, preceded by my 2-word question in brackets:

[Contrary Indicator?] - A Market Forecast That Says 'Take Cover' - The draconian forecast in this article by Jeff Sommer for The New York Times was referred to by a member of the USA's CNBC 'Squawk Box' team this morning and merits mention as the most extreme of an increasing number of bearish forecasts recently. Here is the opening:

My premise, well known to veteran subscribers, was that extremes of sentiment are contrary indicators. Nevertheless, the crowd will be right for a while so it is important to have some evidence that markets in question are indeed about to turn.

On the 6th of July, and in subsequent Comments of the Day, I pointed out some of the lead indicators in my chart review, which not surprisingly included star performers and Fullermoney themes such as Thailand, Indonesia, The Philippines and India. They had already uncoupled from Wall Street's weak trend at the time.

There is a good chance that these and other relative performance leaders will also signal when the global stock market cycle is commencing its next mean reversion correction. I discussed this prospect in tonight's Audio and aim to illustrate it in Comment later this week.