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  • Simple Verses Exponential - Two Very Different Tales 2 comments
    Jun 22, 2009 9:42 AM

    Many traders follow moving price averages (which are just the average closing price of an asset over a certain time frame) to ascertain the technical strength or weekness of a marketplace. There are two widely used methods to calculate a moving average: simple or exponential (the latter of which assigns relatively greater weight to more recent closing prices). Some traders eschew the exponential moving average simply because it can be quicker during periods of high volatility, leading to false positive and negative signals. But in periods of relatively mild volatility (such as where we've been over the last month in many of the global equities markets), the simple moving average can tend to be "faster" then the exponential moving average. So, could the simple moving average produce a false positive signal now? Absolutely, which is why conservative traders follow BOTH.

    Sounds like simple enough advice, but there's a big fly in the ointment today: the simple and exponential moving averages in many equities ETFs are telling vastly different stories about where the markets really are, technically.

    Point in case. One of the broadest equities ETFs is the Vanguard Extended Market VIPERs (ticker symbol VXF), comprising small and midcap stocks. Here, the we see that both the 30 day exponential moving average and the slower 50 day exponential moving average have failed to cross above the long term 200 day expontial moving average. When short term price averages are below long term price averages, that tends to suggest the market is in a long term technical bearish trend.  Just looking at these averages, a trader would be very nervous about taking a long position in this asset just now. To put it mildly. In fact, nervous really doesn't describe the situation well at all because in a long term bear market, when price average get close but do not, in fact, cross over, you often see sickening price declines over the near term.

    But the simple moving average tells another story. Both the short term 30 day, and the longer term 50 day, simple moving averages are above the very long term 200 day simple moving average, and crossed over recently. That's often what you look for at the front end of a bull market. Traders looking only at this development with the simple moving average would be piling into risk at the moment.

    In sum, the moving averages are not really towing the line at the moment.  That's about the best way to explain why equities markets are at a key inflection point. Market observers have noticed an enormous tug of war between bulls and bears raging over the last month, which is enough to suggest a large move in one direction is likely whenever either of these two dueling camps throws in the towel. So this may be one of the most precarious inflection points we've seen in the last few years.

     

     

     

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  • Alex Trias
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    Author’s reply » The point may be on the way to becoming moot today. As of 11:00 am, many indexes around the Earth have sliced through their long term support levels, both technical and exponential. The real test will be whether, at some point, equity indexes return to test these moving averages as resistance. If so, a resumption of the downward trend will be likely to continue. If not, we may be in for a long slog. I have opted to take an extremely defensive posture, and concluded the process I launched last week of unloading various high beta ETFs in favor of cash.
    22 Jun 2009, 11:01 AM Reply Like
  • Alex Trias
    , contributor
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    Author’s reply » For anyone out there following my model portfolio, please note that I have removed all equities and allocated entirely into cash, with some bonds. The model will remain largely uninvested until short term moving averages cross above longer term moving averages - at which point I will adjust the portfolios to include equities and junk bonds. Alternatively, if short ETFs enter a technical upward trend (which they are nowhere near close to doing), I may add various short ETFs, and retain close to zero equities exposure. Finally, if equities markets simply flatline, I will review several absolute return strategies and incorporate those into the model portfolio.
    22 Jun 2009, 02:25 PM Reply Like
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