Jim: Hello, Adam. Thanks for joining us. Before we go on to today’s main topic, what’s your take on where markets are and where they go from here as we head into another earnings season?
Adam: I told a reporter just this morning, “The market remains very news-driven. At this point, the jury is still out and that is a primary reason why we are seeing stocks pull back over the past week. So far, this appears to be a normal pullback, but we are watching it closely to see if it develops into something more substantial. Meanwhile, the intermediate and long-term environment remain healthy. One of the key factors of the entire 4.5 year bull market has been easy money from the Fed and (for now) that is alive and well.
Jim: Gold mining stocks seem to walking a tightrope here- up or down next?
Adam: Let’s step back for a min and look at the bigger picture. Gold and Silver are two of the worst performing asset classes this year. In fact, they are both in a bear market, typically defined as a decline of 20% or more from a recent high. At the end of June, after getting pounded all year, Gold and Silver tried to bottom, and then spent the first half of Q3 bouncing from oversold levels. Since early September the bears have regained control of these markets and erased much of the gains seen earlier in the quarter.
Jim: From a fundamental perspective, how can the Fed have no end to money-printing and gold miners keep heading south? Something must change here?
Adam: There is an old saying on Wall Street: The market can remain illogical longer than you or I can remain solvent. And that plays exactly to your point. The long term ramifications are bullish for gold and silver, but to quote another old Wall St adage, we are all dead in the long term. As a market practitioner my primary job is to interact intelligently with what is actually happening in the market, and then align myself with what is happening. So eventually, your thesis will play out- but it is just a matter of when.
Jim: Okay, thanks, and perhaps that brings us nicely onto today’s topic as we’re speaking about reading what the market is actually doing. Today I wanted to talk about something that Midas Legacy readers regularly hear about when we look at stock charts: moving averages.
Adam: Excellent topic…
Jim: What are moving averages (MAs) first of all, for our novice readers?
Adam: There are several types of MA’s but for the purpose of this conversation lets focus on the most common MA which is a simple moving average. The most common definition is that: A simple moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods. But all this is calculated for you and appears as a fluctuating line on a stock price chart. The two most common are the 50 Day Moving Average (DMA) and the 200 DMA.The idea is to draw a line on a chart to help people clearly see the underlying trend: is the moving average sloping higher or lower? Where is the price of the stock in relation to the moving average? In a healthy market you typically see a stock trade above its ascending 50 dma line and its 50 dma is above its longer term 200 dma line. The opposite is true for a weak market. Many investors use the 50 dma line as a line in the sand-if the stock is above it they consider that healthy and vice versa. Please keep in ind this works for all capital markets: stocks, ETFs, the major averages, currencies and commodities.
Jim: And the 50 day moving average (50 DMA) or 200 day moving average (200 DMA) are the most common. And they are basically what the average price was over the last 50 or 200 days?
Adam: exactly, it smoothes out the data by drawing a line on the chart- if the line is ascending that’s healthy, if it is descending that’s not ideal.
Jim: So would you say it’s best never to buy a stock that is below its 50 DMA or 200 DMA?
Adam: I wouldn’t say never but as a general rule of thumb it is not healthy to see a stock trade below its 50 or 200 dma line.There are two more concepts that are important to know: The golden cross and a death cross. The golden cross occurs when the 50 dma line crosses above a 200 dma line, and typically that is a bullish event. A death cross occurs when a 50 dma line undercuts the 200 dma line, and typically that is a bearish event.
Jim: And how reliable are the death cross and golden cross as a trading tool?
Adam: It usually takes some time for a golden or death cross to work, but they are pretty reliable assuming the market is trending in the same direction as the signal. So if the overall market is in an uptrend then odds of a golden cross working are a lot higher than a death cross working, and vice versa.
Jim: Great. Any other thoughts on averages?
Adam: It is important to understand the concept of a moving average. It is a FACT based tool that just measures and illustrates price, nothing else, so however you use them is up to you, but it is a very objective way of measuring price without any distractions or opinions, just facts.
Jim: Are the big funds’ trading computers set to trigger buys and sells based on the DMAs, and that causes the theory to be true?
Adam: Absolutely, they use every tool possible! Just like anything on Wall Street…nothing is 100% perfect…but this is a very powerful fact-based tool.
Jim: And this in itself causes the price movements?
Adam: many times, yes. If everyone is watching the S+P 500 and it is trading near a popular moving average, then it breaks above or below, it will definitely cause people to jump on that trade just because that event occurred.
Jim: Great stuff, Adam, thanks again!
Adam: Pleasure.
