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The Bullish Signal You've Been Waiting For

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Stocks have risen 40% from their March lows. Yet, for some investors, the true bullish signal for stocks came only yesterday.

For the first time since December 2007, the S&P 500 crossed above its 200-day moving average. And if that sounds like so much gibberish -- well, bear with me, because a lot of people take it very seriously, and it could be a signal for lots of investors to get off the sidelines and back into stocks. That, in turn, could help push this rally even higher.

200-day moving what?
Here at the Fool, most of us aren't big fans of market timing. Why? Because historically, it hasn't worked very well. According to one estimate, as many as 80% of all market-timing newsletters do worse than the overall market over the long run.

But by itself, that doesn't automatically prove that all market-timing strategies are doomed to failure. In order to try to figure out if any market-timing strategies actually do work to help returns, our team of analysts at the Fool's Rule Your Retirement newsletter took a closer look at a number of popular strategies in the most recent issue. And although the results were mixed, a few simple techniques had some promising results.

Keeping it simple
One reason why market timing is so difficult is because markets so often behave in the opposite way your emotions indicate they will. When stocks are plunging, it's easy to convince yourself that they're going to keep falling for good -- and then, just as happened back in March, they can bounce back strongly. Then, after a sustained period moving in one direction, you can become convinced that it's time for a reversal. And yet, as the current rally shows, the market can keep moving the same way for a long time without interruption.

If you give in to your emotions, you can get frustrated in a hurry.

But that's one reason why using a strictly mathematical approach like a moving average is so appealing. Rather than having to count on emotions to determine when to get in and get out of the market, all you have to do is keep track of past prices and do a simple calculation. When the price falls below the average, sell. When it goes back above the average, buy. It couldn't get simpler.

Why people like it
And recently, it has worked like a charm. Take a look at the signals a 200-day moving average approach has given on these stocks:

Stock

Sell Signal

Return to Next Buy Signal

Buy Signal

Return Since Signal

Freeport-McMoRan (NYSE: FCX  )

July 22, 2008

(55.2%)

May 1, 2009

30.7%

Goldman Sachs (NYSE: GS  )

May 7, 2008

(36.4%)

Apr. 3, 2009

21.2%

XTO Energy (NYSE: XTO  )

July 17, 2008

(27.5%)

May 4, 2009

13.3%

Apple (Nasdaq: AAPL  )

Sept. 4, 2008

(25.8%)

Apr. 9, 2009

16.5%

Mosaic (NYSE: MOS  )

Aug. 8, 2008

(50.7%)

May 15, 2009

10.1%

Google (Nasdaq: GOOG  )

June 18, 2008

(32.5%)

Apr. 15, 2009

12.4%

Sources: Yahoo! Finance, StockCharts.com.

With these stocks over these periods, you would've avoided a huge portion of the market's declines from September to March, while still getting back in early enough to reap some of the rewards from the recent rally.

Reservations
Given those results, you might think the folks at Rule Your Retirement would have declared market timing a winner. Yet there's more to it than that. Depending on when you look at market performance, there have been long stretches when market timing worked well, and other periods when it didn't work nearly as well as a simple buy-and-hold strategy.

Moreover, many stocks, such as McDonald's (NYSE: MCD  ) , have moved above and below their moving averages so many times in the past year that the signals have been more confusing than helpful.

That's why Rule Your Retirement recently recommended a four-part approach to investing, including some elements of buy-and-hold, as well as mechanical strategies for moving in and out of various investments -- also known as "tactical asset allocation." Foolish retirement expert Robert Brokamp shares his views on both, as well as a couple of other strategies worth considering.

If the market continues to rally, many will point to Monday's milestone as an important step along the way. Regardless of whether you choose to buy for the long run or use a more active strategy, it's useful to know how other investors view what's happening with stocks -- and adjust your own investing accordingly.

You can see more of Rule Your Retirement's look at market timing and tactical asset allocation by taking advantage of our free trial offer. For 30 days, you can read current and past newsletter issues, use our retirement resources, share in our discussion boards, and much more -- and it's easy to get started. Just click here.

For more on investing for retirement and beyond, read about:

Fool contributor Dan Caplinger did much of his buying long before today. He owns shares of Freeport-McMoRan. Google is a Motley Fool Rule Breakers pick. Apple is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy knows what time it is.


Read/Post Comments (6) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 02, 2009, at 2:13 PM, automaticaev wrote:

    interesting.

  • Report this Comment On June 02, 2009, at 2:13 PM, automaticaev wrote:

    yes i see your point.

  • Report this Comment On June 02, 2009, at 7:16 PM, stan8331 wrote:

    One major factor impacting market timing is the greater the number of folks who are trying to do it, the harder and more fraught with peril it becomes. Obviously institutions have been doing it forever, but now you have retail investors jumping in as well. I mean, ChannelingStocks.com has been running prime-time get-rich-quick ads for a long time now.

    I'll look at some metrics when trying to decide on an entry point but as a long-term investor, fundamentals are what really matter for me.

  • Report this Comment On June 02, 2009, at 7:46 PM, Jubii wrote:

    "When the price falls below the average, sell. When it goes back above the average, buy. " Isn't this backwards?

  • Report this Comment On June 03, 2009, at 10:24 AM, ChannelDunlap wrote:

    I salute this article for being more than a plug for a pay service. Too many articles dangle some tasty numbers out there and then go "Well you'll have to get into Rule Breakers/Income Investors/etc to find out!" This one is excellent. It may not be saying "Hey, buy this & this & this", but it covers it's topic well. Thanks.

  • Report this Comment On June 03, 2009, at 11:25 AM, TMFKris wrote:

    Jubii: I'm a copyeditor at the Fool, and this Fool article helped explain for me a bit more about the buy/sell theory.

    http://www.fool.com/investing/general/2004/01/20/stocks-at-t...

    It says: "Perhaps the most oft-used is the 200-day moving average. Technicians will tell you that stocks trading above this average are doing OK, while stocks that trade below it are having a rough time. Indeed, many people will use that 200-day moving average as an inflection point, buying when a stock breaks through it to the upside and selling when a stock falls under it on the downside."

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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