Why every investor should pay attention to the 200 day MA

200 Day Moving Average (Part 1)


With all the talk over the past couple years on how Buy And Hold is dead (whether you believe that or not), I think it's prudent to at least re-examine your rules for when to buy and when to sell so you can maximize your own profits or avoid steep losses.


Most individual investors just hold their stocks through downtrends thinking that over the long term the stock market will appreciate. I am here to challenge that viewpoint and perhaps give you a simple alternative that can save you a lot of losses in any recession. If you a trader, you probably know everything about moving averages, but most individual investors don't even pay attention to them. I think this is a mistake.


Ask anyone on the Street, and they will tell you that today's stock market is driven largely by technical patterns. One of the most basic indicators that everyone on the Street looks at is the 200 day moving average of the S&P 500. This is largely considered a key technical long term trend indicator of the overall market.  If the S&P 500 is above its 200 day moving average, it is bullish for the overall market. If the S&P 500 is below its 200 day MA, it is overall bearish for the market.


Before we examine why the 200 MA is so important, I need to emphasize one of the rules of investing and trading that most novice investors don't understand:  "NEVER LOSE MONEY".
That was not an attempt to be facetious.... Although don't take it too literally either.  Not every investment or trade will be a winner. Not even the best traders/investors in the world can achieve that.  The universal key to profits is knowing when to cut your losses.... and to do so quickly before losses stack up.  This is largely regarded as the #1 mistake novice investors make. They hang on to the stocks thinking that the market or their stock will recover eventually.... until the market just gets sooo bad, that they can't take the pressure anymore and they sell their stocks in a panic for a substantial loss. Sound familiar?  I've been there myself in the past.  This should be your #1 goal to avoid this scenario at all costs because it can literally kill your portfolio in a heartbeat.


So how does this have anything to do with the 200 Day Moving average?  Well, as I will demonstrate (in part 2), the 200 Day Moving average is the simplest way I know that investors can avoid having their portfolios decimated in a recession.... guaranteed... if you use it correctly.  It can enhance your long term returns so much, that you will be overjoyed compared to the LT Buy & Hold methology of the past 10-20 years.  Not only that, but the best part is you only need to spend a few short minutes a week pulling up a Yahoo Finance chart.


Part 2 coming soon.

Housing Outlook Unchanged

I see many people saying that housing has bottomed and that real estate purchases are on the increase now and our future is bright.  As I posted in November 2009, I see continued downside in housing, and I have not wavered in that view.  


It's not surprising at all, however, that real estate "appears" to be in recovery right now.  Interest rates are at all time lows and can't go much lower, the stock market is rallying with the media having a field day calling an "economic recovery", we have government giving tax incentives for real estate purchases, and there is increasing chatter in the media that the window of opportunity is closing fast on buying a home with rates as low as they are.  It's no surprise that we see a small surge in home buying with those variables in play.


I expect Case-Schiller numbers at or below 100 once the government stimulus programs and tax incentives are done with and we see interest rates return to normal levels. You can't fight supply and demand, we have too much housing inventory built up from the housing bubble and the prices are still too high. Price supports and tax incentives just prolong the agony. Once prices have fallen to a point where we see property management firms sprouting up to acquire properties and convert them into rental units then we'll finally get some stability in the housing market, not before. Right now, we are still in the era of property prices being too high to even break even on rent monies!  You didn't see that before the housing bubble!


The housing bubble has really created a number of beliefs in the American public which are totally false.  The most obvious one is that home prices will always rise.  This has already been disproven, but yet people still think that we cannot have more downside. Go figure.  Housing can go up and down just like stocks.  It's true that it's not as volatile as stocks, but home prices can get ahead of themselves like any other asset. Home prices have still not corrected back to the level of long term inflation, and I believe supply & demand and low consumers savings rates actually predict that we will fall below the inflationary rate in the medium to long term until people start cleaning up their own personal balance sheets.


This is why I'm still not buying a home, even with today's low interest rates.  If I were desperate to get out of apartment living, then I probably would though, because rates are going to rise soon enough. But for now, I'm OK with apartment living.

Inflation & Gold

The following article was actually written on March 16, 2010, but I've been slacking on my blog updates lately. I'm going to try to keep more regular updates in the future and start posting this URL in more places to gain views.


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Foreword – Why I am writing this

First of all, let me go on record and say I am not trying to be Mr. Doom and Gloom here.  I am interested in one and only one thing: the truth.  Truth comes from homework, research, verifiable facts,  but not the media.  My goal with this blog is not to depress people, but to prepare them for what’s coming. I do not expect anyone to just believe every word I say at face value. Even if you might have a lot of doubts, if you admit just a “small” possibility of these events coming true will prevent some people from getting blind-sided yet again by our ongoing economic crisis’s.  Maybe I’ll even influence a few people to do their own research and confirm the “truths” themselves.

Let me just get it out of the way right now.  I am making a very bold and very dire prediction here, but it is not a unique one.  I predict the decade we have just begun will turn out to be a decade from hell from an economic stand-point. I believe it may even be worse than the Great Depression.  My reasons are numerous, which I will write about over a series of articles. 

Starting with….

Why high inflation is not only probable, but a virtual certainty

First we need to level set everyone and review what exactly causes inflation. You can verify this in any Economics 101 book, but I'm pulling this from Wikipedia:

• "Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply."
• Furthermore, "the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth"

Today, the primary argument I hear & read against the possibility of high inflation is that it hasn't happened yet even though we have been printing money like mad. This is of course explained by the fact that all this printed money goes right into bank reserves to capitalize our banking system. And it's well known that banks are still not lending this money. In order for inflation to occur, 2 things need to happen:

1.       Growth of the money supply (done and still very much in progress)
2.       Increase of velocity of the money supply. (NOT done).  In laymen’s terms, inflation doesn't happen unless that printed money is in circulation. If it's sitting in bank vaults, it won't cause inflation.

The Fed is the #1 holder of our own U.S. treasury debt.... Far beyond even China at something around $5 trillion. Doesn't this strike a red flag in your mind?  We are printing money to buy our own debt!  Oh if only I could do that. I could just rack up Millions of dollars worth of credit card bills and never have to worry about it because I could just print my own money to pay it off.  What an idiotic idea. It's simply common sense that this will have severe consequences down the road, but our political system focuses only on short term re-elections not long-term viability.

This is really just Economics 101. The United States is not immune to the laws of economics. Inflation occurs when you expand the money supply (IE print money), once that money starts circulating. We have 1/2  that equation today. The banks are still not lending it though, but they will eventually.  This is an immutable law of economics like supply & demand. You can't get around it. It just is what it is.

We will see double digit inflation in the coming years at a bare minimum. It's hard to see any scenario where we don't see all-time high inflation (well into double digits) due to astronomically high money supply expansion.  If  our government continues printing money at the pace it has been, chances of hyperinflation (50%+ inflation) will keep rising.

[following is an except from Peter Schiff, In speaking about an opposing economist's statement]

"... that we can borrow money from the world with impunity, that we can print all the money we want, and it's not going to affect inflation, it's not going to affect interest rates. According to Paul Krugman, as long as we a have high rate of unemployment, we can print all the money we want. Interest rates won't go up, inflation won't go up. I got news for anybody who believes in this, including Krugman, They are in for a rude awakening. This again is even more irrational than the people who were saying the Dot Com era is a 'new era', or that the real estate prices were justified by the fundamentals, they would go up forever. In the long term scheme of things, when they write the history books about this period of time, this is going to be the 1 thing that people look at and say "I can't believe people were that dumb."  It's like we look back at the Salem Witch Trials, and don't understand how people could burn witches. This is how. It is the mass popular delusions and the madness of crowds." - Peter Schiff, 03/16/10

This is what Schiff has a real talent for.... calling out the bullshit. He's usually arguing against a crowd of optimism and "hope", but he has demonstrated time and time again that he has more understanding about what is truly going on in our economy than anyone else.  Remember, hope and optimism don't influence the economic reality. You need to be on your toes and be prepared for what is coming down the road.

The case for high gold prices

Of course, once you become convinced that high inflation will happen, high gold prices follow automatically.  It's not speculation. It's simple math. As the value of the dollar goes down due to inflation, any fixed value asset (e.g. gold) PRICED in dollars goes up.  This is because it will now take more Dollars  to purchase the same quantity of that fixed value asset. There is a famous illustration on gold prices that says something like this:

4000 years ago, an ounce of gold bought you a fine man's suit.  Today, an ounce of gold buys you a fine man's suit.

True, gold prices are volatile in today's stock market. But gold is storage of value that does not deteriorate in terms of purchasing power over the long term.

Paper currencies come and go, but they all eventually go to Zero through dilution over a long enough time period. However, gold keeps it value throughout  time.  Therefore, you can think of it as a hedge against inflation. It's protection that everyone needs in this day and age. Anyone who believes that our reckless fiscal policies will actually lead to a long term APPRECIATION of the dollar or of the dollar keeping its value is being naive.  Let’s think about this rationally…. If we can just keep printing money, and get a strong dollar out of it, why not just keep the printing presses running 24/7/365 for the next 50 years?  How strong will the dollar be then??  Will gold then go to zero?   Of course, this is nonsense.  There’s only one direction the dollar can go long-term with relentless printing of money. And that is down.

Now, multiply this ten-fold because most major developed currencies are deteriorating in value from ongoing financial crisis’s around the world.  The Canadian Dollar and the Australian Dollar are two notable exceptions.  The Euro and now perhaps even the Yen are on a downhill course.  As more and more people and central banks become leery of these deteriorating currencies, guess what they’re going to flock to?  Come on, I’ll give you 3 guesses.  Nope, not Pork Bellies.  Nope, not Slinkies.  Yes, GOLD.