BP wasn't the only stock to tank

Lot's of bad news all around. The market was in free fall. Just how bad was it?

By Jim Van Meerten Jun 5, 2010 11:47AM
Each weekend I forget about all the contradicting talking heads and headlines and look back at my 3 yardsticks of the market to let the numbers not the opinions and prejudices of others tell me what really happened. I use 3 yardsticks for 2 reasons. First, each measures the market in a similar but different way. I want to know the percentage and direction of the market's movement. I want to know how much of the market was involved in that movement. And lastly are we at new tops or new bottoms or just solidly in the middle of a reversal? The second reason I use 3 is in my awe of the wisdom of the Supreme Court. 3 is an odd number so you never have a tie. All my data can be duplicated from Barchart if you'd like to run the numbers yourself during the week.

Value Line Index -- I like this Index better than the S&P 500 or the much narrower Dow 30 because it contains 1700 stocks so it gives me a better feel of the overall market and not just the large caps -- This week the Index is down
  • For the week the Index lost 3.58%
  • The Index was down 3 days up only 2 days
  • The Index was down 3 weeks up only 2 weeks
  • The Index was up 3 months down 2 months
  • If the Index was an individual stock it has a Barchart technical rating of 64% sell
  • 2 buys, 1 hold and 10 sells on Barchart's 13 technical indicators
  • Friday the Index closed below its 20, 50 & 100 day moving average

Barchart Market Momentum -- The percentage of stocks trading above their Daily Moving Averages for various time frames -- above 50% is bullish, 50% is neutral , below 50% is a bear trend -- This week we are in a bear trend

  • 20 DMA -- Friday only 23.44% closed above -- Last week 30.97% closed above -- Last Month 32.99% closed above
  • 50 DMA -- Friday only 30.97% closed above -- Last week 27.13% closed above -- Last month 46.43% closed above
  • 100 DMA -- Friday only 15.44% closed above -- Last week 31.70% closed above -- Last month 52.20% closed above

Ratio of stocks hitting new highs to stocks hitting new lows for various time frames -- 1.0+ bullish, 1.0 neutral, under .99 bullish -- No good news here -- Many more new lows than new highs

  • 1 month new highs/new lows -- 219/827 = .26
  • 3 month new highs/new lows -- 107/622 = .17
  • 6 month new highs/new lows -- 88/316 = .28

Summary and Investment Strategy -- The market is definitely in a downward trend. Here's my advice:

  • If you are young and between the ages of 21 - 45 dollar cost average into any downward market. Throw all the money you can into your 401K and Roth IRA. The market will be different before you retire and start dipping into your retirement funds
  • If you are middle aged and between 45 - 65 -- depending on where you are between those 2 numbers you should transfer your assets to cash ( 401K and IRA money so it's not a taxable event) and let your assets sit on the sidelines till a recovery occurs but dollar cost average into the market with your new money additions to your retirement accounts.
  • If you are 65 and older you should be in a very conservative position. Protection of your assets is the most important factor. If you are actively trading your retirement assets you need to trim off any investments trading below their 50 DMA and if you are a more long term investor maybe the 100 DMA is a better stop loss for you. If living off dividends this might be a time to buy on the dip some stocks with a superior strength and dividend record. As always when buying dividends make sure that the company's' earnings forecasts cover the dividend and project increased earnings so that dividends will increase in the future.

Jim Van Meerten is an investor who writes on investing matters here and on Financial Tides. Please leave a comment below or email JimVanMeerten@gmail.com

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