Friday, January 2, 2009

The Market Backdrop for 2009 - the Big Picture

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Let's recap what took place in took place in the market in 2008. It was a year of huge price variation. Below the price ranges of the major indices and commodity ETFs:

DJIA ----------- 7392.77 low---13338.23 high
SP500 -----------741.02 low --- 1471.77 high
Nasdaq ---------1295.48 low--- 2661.50 high
Russel 2000 ------371.30 low ----768.46 high
Oil (the ETF) -----19.38 low ------88.15 high
GLD --------------66.00 low-----100.44 high
SLV----------------8.45 low------20.73 high

The end of the year is always a good time to look at the big picture for the indices as well. As we have mentioned in this blog several times, the 200 month simple moving average is a key support level that it rarely violated. The last two times this has happened was in the mid 1970s, when it occurred for around 6 months and in the first half of the 1930s, when it lasted for a few years. At the end of 2008, all the major indices violated their 200-month moving averages in the last 3 months of the year. The Dow Jones and Russell 2000 have not closed below it on a monthly basis however, while the S&P 500 and Nasdaq have had 3 closes below this line. For the market to indicate that it is becoming healthy again, the indices need to move above the 200-month moving average and stay above it as happened in the 1970s (even then it still took many years before a major bull market began again).

The monthly charts also indicate that at the very least some sideways consolidation is necessary for awhile before any longer lasting move up is likely to take place. There can be tradeable rallies in this sideways pattern, which lasted around 8 months in 2002/2003. The indices also have a tendency to double or triple bottom and this is particularly true for the S&P 500. If you look at a longer term chart, you will see a double S&P bottom so far in 2002 and 2008 (and a double top in 2000 and 2007). The S&P making a triple bottom (and even a triple top in the future) is something that should be considered.

Best of luck with your trading in 2009.

NEXT: What We Learned from the First Trading Day of 2009

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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