The Exchange

The Fed vs. Gravity

The Exchange

By John Kosar, CMT

The phrase “don’t fight the Fed” has certainly worked this year as the quantitative easing-fueled S&P 500 has already risen by 230 points or 16%, with hardly a correction in between and another five months left to go in 2013. However, another phrase, “don’t forget about gravity,” deserves equal consideration.

The chart below plots the bellwether S&P 500 daily since 2010 in the upper panel, with the index’s daily percentage either above or below its 200-day moving average (a widely watched major trend proxy, orange line) plotted in the lower panel.

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The S&P 500 is currently 11% above its 200-day moving average. The red highlights on the chart show that previous instances that the S&P 500 rose 12% or more above its 200-day moving average either coincided with or led a stall in the advance that took it there, and that the subsequent decline ranged between 8% and 18% from the highs and lasted anywhere from 8 to 24 weeks.

So, while this metric by itself is certainly not a reason to cash in your chips, it may be a reason to consider more aggressively protecting them.

John Kosar, CMT, has 30 years of experience and insight in covering the global financial markets. John spent the first half of his career on the trading floor of the Chicago futures exchanges, where he had the opportunity to learn how the US financial markets work from the inside out. This experience, early in his career, became the foundation for the unique analysis, insight and perspective that defines Asbury Research. John is frequently quoted in the financial press both in the US and abroad, and can be seen regularly on U.S. financial television.

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