Markets

Does The Stock Market Have You Confused?

By Adam O'Dell  |  August 12, 2019

It’s been an incredibly rough 18 months for the stock market. You can just see it in the charts:

 

I’m a “numbers guy.” I always find it helpful to quantify — with actual historical data — what I see in the charts.

Recently, I shared with my 10X Profits subscribers my analysis and conclusions about this messy stock market we’ve been in over the last 18 months or so.

And to do so, I looked to the number of bearish crosses under the 200-day moving average that have occurred over a rolling window of 18 months.

For instance, the S&P 500 has crossed below its 200-day moving average (aka “bearish cross”) on eight instances over the last 18 months. And if the index falls below roughly 2,800 ahead, that’ll make for the ninth cross.

How does this eight-crosses-in-18-months rate compare to previous market conditions?

What trend — bullish or bearish — tends to follow messy stock market conditions like this one?

And what did this indicator look like just before the 2008 crash? And before the dot.com crash?

Let’s dig into those questions and see if we can “see” what’s ahead…

A Few Historical Scenarios

2005-2008

In May 2005, the number of bearish crosses over the trailing 18 months rose to eight.

This was, in hindsight, the first early warning of the market’s eventual October 2007 top, though the number of bearish crosses climbed as high as 13 by October 2006 and eventually peaked there in January 2008, just as the Great Financial Crisis was getting underway in earnest.

In this instance, the high number of bearish crosses was a sign of trouble ahead.

2000-2002

It worked much the same during the dot.com top.

The number of bearish crosses rose to eight by May of 2000 and eventually climbed as high as 13 by October of 2000 — coinciding with the top in stock prices.

This instance, too, the high number of bearish crosses was a sign of trouble ahead.

But There Are Counterexamples…

A high rate of bearish crosses doesn’t always lead to a bear market crash.

Often, it’s just indicative of a messy, confusing and frustrating market environment, though nothing more than a “tough time” that is eventually overcome by a new bullish trend.

August 2010

After bottoming out then rocketing higher in 2009, stocks hit a rough patch in the summer of 2010, when seven bearish crosses occurred over the trailing 18 months. But stock prices recovered and moved higher.

2011-2013

The summer sell-off of 2011, and a milder stumble in the summer of 2012, also characterized a tough environment for stocks. There were seven bearish crosses over trailing 18-months that persisted into early 2013. Stock prices recovered and moved (strongly) higher through 2013 and 2014.

2015-2016

The market got tough again between late 2015 and early 2016. Remember, January 2016 was the worst January the market had ever seen!

All told, the rate of bearish crosses had climbed to ten by January 2016. But, once again, stock prices recovered and rocketed higher, particularly between November 2016 and December 2017, as Trump’s election win sparked optimism.

Let me give you another, older example…

1994

After doing well in the early 1990s, stocks hit a rough patch in 1994.

Specifically, stock prices hit a wall in February 1994, dropped 10% into April, then traded sideways in a volatile “chop” for the remainder of the year.

By December of 1994, the rate of bearish crosses in the trailing 18 months hit a peak of ten. Then, guess what happened next…

Stock prices recovered. And even tripled over the next five calendar years.

So, What’s the Conclusion?

Unfortunately, we can’t conclude much about the current messy market conditions.

History shows that sometimes these bearish crosses act as a “canary in the coal mine,” giving early warnings of trouble to come.

Though other times, they’re merely indicative of a tough market that will eventually recover and pave the way for a new, lucrative bullish trend.

I know it can be frustrating to realize the future is so difficult to predict, but that doesn’t mean you can’t succeed as an investor — even in uber-uncertain times!

Systematic investing is designed specifically for investing through uncertainty.

As systematic investors, we don’t claim to know the future. The best we can do is learn from the past and choose to implement prudent investment methodologies with discipline.

That’s what 10X Profits is all about. We take a systematic approach to riding the market’s waves — up and down. And even though messy “sideways” markets, like this one, can be frustrating. We know big trends (up or down) always emerge eventually. And we’ll be ready!

To learn more about 10X Profits and this systematic way to investing, click here.

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Adam O'Dell

As Chief Investment Strategist for Dent Research, Adam O’Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with minimum risk. He achieves this with his perfect blend of technical and fundamental analysis.

Tactically, he does extensive back-testing and probability-based research. It’s the ultimate partner to the exhaustive research that Dent Research co-founders Harry Dent and Rodney Johnson do in the exciting realm of the new science of investing.

Adam is also the executive editor of our hugely successful trading services, Seven-Figure Trader, Cycle 9 Alert and 10X Profits.

He has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high-profit potential.

Aiming to find the best opportunities across all asset classes, Adam expanded into the commodities, equities and futures markets. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. MORE FROM AUTHOR