Watch the Moving Average

Digital video recorders (DVR) are wonderful products. What started as a niche product with the launch of ReplayTV and TiVo at the 1998 Consumer Electronics Show in Las Vegas has become ubiquitous. Now included in most cable boxes, DVRs have revolutionized how we watch television.

A fan of the ability to skip commercials and pause live action, DVRs are also an excellent tool to judge market sentiment. Since we can catalog and saves shows, it is easy to compare opinions today with what dominated in the past.

Such a comparison entered my mind this past Thursday. After the Dow Jones Industrial Average (Dow) declined 376 points, the talking heads on CNBC expressed in near unanimity that the trend for the rest of the year was lower. As the Dow had crashed below the important 200-day moving average (MA), I tended to agree with the sentiment.  However, a quick glance at the DVR showed that these same negative analysts were upbeat the prior week. Always skeptical, I am never one to trust "experts" who change opinions in such quick fashion. Bob Dylan didn't need a weatherman to know which way the wind blows, and we don't need trend chasers disguised as market timers.

Instead of relying on popular opinion, we are left with an unanswered question. If the recent weakness is a pullback during an ongoing rally, we should all be buyers. However, if the move from the March 2009 lows was a bear market rally, head for the exits.

Answering this question correctly will deliver tremendous gains. Bulls will look toward an improving economy, sky-high volatility, and a plunge in the number of NYSE stocks trading above their 50-day MA as signs that fear is high and an oversold market is bound to rally. Bears have fewer arguments, but one key one. With the Dow and the S&P 500 both trading below their long-term 200-day MA, the trend has reversed. Until the bulls can mount a counter attack that pushes prices above the 200-day MA, I consider the primary trend lower.