We have touched on investment truisms many times before. These tend to be nifty phrases, usually used by those of a certain age and looked upon as being either sagely or antiquated by everyone else. I may try to accumulate these into an indulgent lexicon if I find the idle hours over the summer, but for now I would like to focus on just one of these: “the trend is your friend”.
To help explain this, I need to debunk a piece of jargon. Hopefully everyone is familiar with the expressions “bull market” and “bear market”. The financial industry has tried to find mathematical definitions of these, none of which has any basis in fact. The accepted, though incorrect definition of both is that the market should have moved, up or down, by 20%. No one knows where that number came from, nor its justification. It is just something that someone somewhere once made up, and as if by magic it became the definition. As a quick tangent, a fall of 10% is currently deemed to be a “correction”. This is also bizarre. As far as I know, there is no equivalent name for a rise of 10% and there is no reason why a drop should be “correct”. Logic can be very over-rated.
Anyway, it is arrant nonsense to suggest that a market which has risen 20% is a ‘bull market”, while one that has gained a mere 19.4% is not. It is what I might paraphrase to be gobbledy. Bull and bear markets should be defined by their trend, not by an arbitrary magnitude. It is far more useful to understand bull and bear markets as having a prevailing trend.
With my apologies to Louis Jordan, this begs the question of is you is, or is you ain’t, ma trendy? How should one spot a trend? Like beauty, a certain amount is in the eye of the beholder, but there are also some very helpful guides. Here, we need to touch on some very simple “technical analysis”; this is less scary than it sounds, and merely involves studying charts of market levels (or the price of whatever it is one is trying to analyse). One of the most important pieces of information to understand is the role of the “moving average”. These are average levels of the index (or price) over whichever timescale one wishes to look at. For market indices, the most popular moving averages for shorter and medium-term trends are 50 and 90 days. The key one, though, for the longer-term direction of the market is the 200 day.
We use 200 days exactly merely for convenience. It could equally well be 199 or 201 days, but they would sound silly. So we, and everyone else, plumps for 200 days. These are working days, so this represents the last 40 weeks, or 10 months. This, so years of data teach us, is a highly reliable indicator of whether a trend is up or down. A rising 200 moving average says that investors are increasingly willing to pay higher prices. And vice versa for a falling average.
The reason why we are lingering on these niceties is that the 200 day moving averages for many of the major equity indices have started to turn upwards. This is the first time that this has happened since markets turned down in response to higher interest rates. So, the MSCI World Index, which can be taken as being quite helpful in understanding how markets are moving globally, is trading above its rising 200 day moving average for the first time since January 2022. It is also the first time since mid-2020 that this has happened after a large market fall.
I should sound a note of caution. It is still too soon to break out the bunting and call a new bull market. It is early days, and having looked at these helpful pictures over five different decades, there are plenty of false dawns. But at a time of so many strikes, of a rising fear of recession, especially in the US, of ongoing war in Europe, of Chinese war games and of an alleged banking crisis, there is a quantum of solace in that markets appear to be looking for better times ahead.
After last week’s unexpectedly benign update to US inflation (CPI fell to 5.0%), this week we have the monthly updates for the UK and the Eurozone. We also learn how much the Chinese economy grew in the first quarter, while the corporate earnings season in the US picks up a bit of speed. It will be a busy and noisy week. And after having written so much about the trend of the markets, they are also overdue a little hiccup.
Finally, well done to all those who spotted the lines from Band on the Run. Today, what beverage would link getting caught in the rain, the feel of the ocean and the taste of champagne?
Jim Wood-Smith – Market Commentator and Head of Climate Transition
All charts and data sourced from FactSet
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