In Long-Term Indicators We Trust

|
 |  Includes: SPY
by: Prieur du Plessis

While pundits were screaming “bear market” when the benchmark U.S. and other major stock market recently declined by more than 20% (only to claw back almost half the losses during the past few days), I preferred focusing on a few long-term indicators to provide some guidance through the period of extreme volatility.

By means of example, the chart below shows the long-term trend of the S&P 500 Index (green line) together with a simple 12-month rate of change (ROC) indicator (red line). Although monthly indicators are of little help when it comes to market timing, they do come in handy for defining the primary trend. An ROC line below zero depicts bear trends as experienced in 1990, 1994, 2000 to 2003, and in 2007. And September 2011? Although the ROC touched the zero line, it never fell below it and the primary bullish trend therefore remains intact. A close shave if ever there was one!

Click to enlarge

Source: StockCharts.com

As I said in yesterday’s post on global stock market moving averages, I would not be surprised to see a further recovery in global stock markets over the next few weeks, with those markets most deeply oversold relative to their 200-day moving averages offering the strongest recovery potential. But until we see the majority of the global indices (as well as the majority of individual stocks) breaching their 200-day lines, the rally will lack conviction, and the ROC’s zero line will remain uncomfortably within reach.