Looking at the long-term chart for the S&P500 (^GSPC) I have noticed that 2011 looks a lot like 2010: a high in the spring followed by lows throughout the summer.
That’s not very scientific so let’s do a little measuring.
- In 2010 the S&P500 hit a 52 week high in April (1,217), fell 15.9% over the summer (to 1,023), recovered by 4th November and then advanced a further 3.5% above the April high (or 23.2% above the summer low) by December (to 1,260).
- In 2011 the S&P500 hit a 52 week high in April (1364), fell 18.0% over the summer (to 1119), and then…
Well, we don’t know what happens next but if the pattern continues, we should see the S&P at between 1379 and 1412 by year-end. So, based solely upon this chart, there seems to be no more to worry about this year than last year. So how do we trade this? If there is going to be a recovery, what will be the trigger to buy?
- The price crossing the 50 day moving average upward? No. This happened in July 2010 but the gains were fleeting and were lost the following month.
- The price crossing the 200 day moving average upward? No. This happened in August 2010 but those gains were lost later that month.
- How about the 50d moving average crossing the 200d upward. This did not happen until October 2010, after the recovery was well underway, but it was a solid place to enter the market. Anyone entering the S&P at this point would have seen 15% gains by the April 2011 high.
Using this information I predict that the S&P500 will recover to it’s April 2011 high later this year. I also predict that the 50d moving average will cross the 200d upward at some point before that, which will represent a good time to invest in the index.
Writing today, December 30th 2011, this prediction has not come true. There has been no recovery by year-end. The prediction may well bear out in 2012, but the market is still in the doldrums today. The 50d moving average has moved up towards the 200d average, but not yet crossed, so that may still be a good buy trigger.
Writing today, 15th March 2012, this prediction did eventually come true. The 50d moving average crossed the 200d at the end of January and has increased sharply since then to it’s current level of 1400. My S&P Fund is up 5.4% since the end of January.