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I'm largely in medium term bonds (less volatility, small capital gains and losses ) but price momentum is almost telling me to get back into the Australian All Ordinaries.

Aus All Ords and SMAs

With the All ords at 4475.1 and
A. Index > 50 SMA (by 46.2 points)
B. 10 SMA > 50 SMA (but only by 0.2 index points)
C. 10 SMA only 2.1 points below 30 SMA
D. 30 SMA > 50 SMA (but only by 2.3 index points)
E. Index at my downtrend line which runs slightly above the 14 April and 21 June peaks and is being crossed from below by the index now momentum is *almost* telling me to increase my holdings significantly.

A couple of other things I watch (but which are derivatives of the value of the index) are also positive:

Oversold recovering
A chart of the 10 day SMA of the Index against 200 SMA of the index has turned up. The degree of oversold reached -0.109 on 5 July and is now -0.058. My percentiles chart tells me that the index has been oversold against the 200 SMA
more than 0.058 only 17% and more than 0.109% only 8% of the time since 1984.

Two month change clearly trending up
10, 30 and 50 SMA's of two month change have turned up with 10 day having been below -0.1, a level it is worse than only 9% of the time from 1984 to today.

Maximum Size of this Correction
The maximum fall in the index of 15.2% below its most recent high (now -10.9%) is very close to the -18.05% average and the -16.29% median of falls greater than 8% since 1984 (treating all falls as fall as having ended at the low before a rise of 8% or more). Given that while we are up 43% from the bottom we are still 34% below the previous peak, a correction of 15.2% from being 61% above the bottom is, while not as large as some, quite a large correction for a recovery.

The 10 SMA of 10 day average volatility has clearly turned down after the peak of May/June (although a slight concern is that it has gone flat at 0.9 compared to an average ('84 to now) of 0.6 but it was at around 0.9 through most of the rise out of the July 09 dip.) My percentiles chart tells me that the market spends 84% of its time with less volatility than it closed with on Friday 23 July and lower volatility generally means a rising market.

It is the combination of somewhat sustained changes in direction from points that are in the bottom 15% of percentiles that tells me to invest if the index gets the 10 SMA clearly above the 30 SMA and 50 SMA.

My reading of the fundamentals (US ECRI WLI, calls for austerity around the developed world, deficit hawks and pullback and slowdown in China) is that I will get whipsawed within 2 months (based on 10 vs 30 SMA's) but I will probably take the punt if the market moves up so that 10 SMA breaks clearly above 30 SMA. If things get much worse I would expect there to be a policy response to curtail any double dip.

Risk of Whipsawing
The greatest danger using strategies based on SMA's is that the market trends sideways in volatile fashion giving lots of buy and sell signals leading to multiple loss making transactions with multiple transaction costs.

In the upswing from 2003 a buy signal based on 10 SMA and 50 SMA made money 7 out of 9 times if you sold on the next bearish cross of 50 by 10.

In the downtrend from 2007 to 2010 a buy signal would have resulted in losses on 3 out of the 4 buy signals, but if you also followed the sell signals of 10/50 you would have missed about 80% of the decline in value.

So in short, a clear uptrend is limited risk/loss/opportunity cost, a clear downtrend is limited risk/loss but a sideways trending market is a high risk and I estmate (from eyeballing the charts) that has been about 20% of the total time in the market since 1984.

If it weren't for my fear of long term household sector deleveraging I would probably just stick to an "efficient frontier" style portfolio constuction of 60% equities (20 in US, 20 in Europe, 20 Emerging), 40% bonds (20 long, 20 short term) rather than trying to follow trends / time the market - better people with more resources than me have lost money or earnt less than a balanced portfolio with similar strategies to those I am trying.

Disclosure: 30% in stock market through emerging, commodity, Australian and international funds, 70% mixed bonds (plus Australian real estate exposure)

Source: Australian All Ords: Time to Get Back In?