Percent of Stocks Above Their 40 Day Moving Average
March 18, 2009

Just how long will this rally last?  Is this a bear market rally, or the real deal, a major turn in sentiment?  The truth is it doesn't matter what we call it.  It's a bull rally.  For those of you that scaled in to the market over the past 6 months, you are doing well during this 850 point Dow upswing.  The question I have gotten more than any other this past week is: "Is this the bottom?"

It may or may not be the bottom.  It doesn't matter.  One hundred years ago, the venerable JP Morgan was often asked "Mr. Morgan, what do you think about the market?"  The staid banker would reply "The market goes up, and the market goes down.".  Picking bottoms or tops is not the way to succeed in the market.  Buying when everybody else is selling always pays off.  Fear is your friend, to paraphrase Warren Buffett.

Percent of Stocks Above The 40 Day
Moving Average vs S&P 500

This rally still has a way to go.  The above chart shows the four significant rallies we've had since the market peak in October, 2007.  Each rally has been, by definition, a bear market rally.  Counting the green arrows from the right, the last 4 bull runs have all occurred at the start of or during this 17 month bear market.  Now comes the interesting part...

A common indicator is the percentage of all stocks that are trading above their 40 day moving average.  This simply means that the stock closed above it's average price over the past 40 days.  Some technicians use a 50 day MA, others a 30 day, but it really does not make a difference for our purposes.  During this bear market, we've had rallies that lasted until AT LEAST 60% of stocks traded above their 40 day moving averages.  The chart clearly shows this.

The reading as of today is 31.6, which means that fewer than 1/3 of all stocks closed above their average.  I believe this rally, whether it's a bear market rally or a new bull market, will last at least until we get over the 60% level.  At that time, we can re-evaluate the macroeconomic and technical situation.

All the best,
Dan Grill