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Trend Indicates "Buy" on SPY

|Includes: SPDR S&P 500 Trust ETF (SPY)

I wrote a couple of days ago about how the market (S&P 500) was reaching--and has exceeded-- some level of 'fair' value. However, price momentum is still strong, leaving an investor to wonder whether the fundamentals or technicals will be first to catch up (down) to the other.

One tool an investor can use to get a better sense of when to buy/sell is to use moving averages. On the weekly chart, we see that the 40 week moving average, a good long term indicator, has finally begun to go up. In addition, SPY is now trading above the 40 week average, a bullish sign for investors (it is also trading above the 40 week exponential average, not shown). In addition, the 20 week average is going up and is now trading above the 40 week average. SPY is trading above both averages which indicates a bullish trend. I previously featured the history of this strategy first brought to my attention by QVM here. The indicator tends to give few buy/sell signals so it is signficant that it now signals a 'buy' on the SPY.

I am skeptical about the fundamentals underlying this recent rally. It feels 'too fast', and I sense that is the consensus from the investments commentators. This could tell us something in itself. If the consensus was always right, we'd all be rich.  Thus, we need a more discplined strategy then what our 'gut' tells us, like the 20/40 week system mentioned above.

The ultimate question for the common investor is what to do with his or her entire portfolio besides just diversifying holdings (which I still believe is the most important investment decision). Using SPY as an example, we see how easy it is to get conflicting signals using fundamental and technical analysis together. The fundamentals are not very exciting but the technicals are very encouraging. One course of action would be to diversify your strategies. Have a small portion of your portfolio dedicated to buy and hold, which will give you constant exposure. Use a moving average strategy to catch major trend movements and avoid many of the major declines and also consider a momentum strategy to capture momentum and shorter term trends.

Managing these systems can be time consuming, so for free monthly updates and other commentary please visit Scott's Investments.

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