Stocks and the Start of 2016

On 08/22/2015 I posted this – noting that it seemed the opinion of Institutional Investors (e.g. Mutual, Hedge, Pension Fund managers, etc.) had turned for the worse.   It seems I have been proven correct.  I am a market genius, yes?   No! I can point to 2 other posts where I was dead wrong. 

But, since we are right on this one, let’s dig in a bit deeper.   What is concerning about the present situation is that the market has lost the support of it’s 200 day moving average.  For a long time now we have seen “V shaped” recoveries where a harsh sell off occurs, then the market rebounds nearly as fast and goes on to make a high that was higher than the high, prior to the sell off.

The difference this time is that at the time of the 08/22/2015 post, the market lost support of it’s 200 Day Moving Average (DMA).  Not a real big deal, it happens – but this time it was unable to move back above the 200 DMA for 8 weeks.  Prior to that you’d have to go back to late 2012 (see Chart of the Nasdaq) to find a time when it spent even more than 1 week underneath the 200 DMA! – and then, it was just 3 weeks.

When the market did recover this time, unlike prior recoveries,  it failed to make a higher high and now it is under it’s  200 DMA again.  It is very possible that the 200 DMA will now become resistance, rather than support.

Why the 200 DMA works like that:

As mentioned before, Institutional Investors have to move into their stocks at a measured pace.  They can not just purchase (or sell) the stocks they are interested in all at one time – with the number of shares they have to purchase to complete their desired position in a stock, to purchase all at one time would have too dramatic of an affect on the price of the Stock.  So as a stock, or the market, begins to dip and especially as it touches it’s 50 or 200 DMA,  institutional investors step in and support their stocks by purchasing more shares – this causes the price to go up.  This makes the 200 DMA line look like a magical line of support (because it is).

The reverse is true when they want to get out of a position.  When it is evident to them that the ride is over, they’ll sell as a stock or the market approaches the 200 DMA, which now makes the line appear like resistance.

Please note, these posts are directed toward individuals that invest in individual and more aggressive Small to MidCap stocks.   This is not for mutual funds Investors.  Stocks that do not have a huge market capitalization can easily move 1.5 to 3 times the direction of the market.  Accordingly, if you own stocks of this size, you have to be prepared act quickly and decisively. 

Regarding Individual Stocks (not the overall market), unless you have a significant profit in a position,  I would submit that it is better to be more keenly aware of how your stocks are behaving around their 50 DMA rather than the 200 DMA for your decisions. 

But I think even more important to note, I am an Insurance Agent, not a Licensed Financial Adviser, so dismiss or use this as you see fit.

Image above is a photo of chart provided by www.investors.com Publisher of Investors Business Daily, easily one of the best resources for the individual investor!  

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