We Want To Buy Stocks On The Way Back Up

It’s a lie that you have to buy low and sell high. We’ve found it much more helpful to buy high and sell higher. We’d rather pay more knowing that the trend is up than try to be a hero and be the first one in.

So how do we know stocks are on their way back up? We utilize the percentage of stocks above their 200-day simple moving average. This is an indicator that gets quoted a lot in bull markets, but for us, it’s most helpful at the end of bear markets.

Click on chart to enlarge view. 

For us, it’s not when the percentage of stocks falls below 15%, the signal is when we’re back above it.

Historically, 15% has been a significant level for those of us with time horizons looking several weeks to several months out (or longer). For this particular timeframe, we cannot own stocks if we’re below that 15% threshold. No one said we can’t go to zero percent or stay at very depressed levels for weeks and months as we saw in 2008-2009.

It remains a trading environment until we see this breadth measure back above 15%, so for the majority of market participants, patience and heavy cash positions remain best. We don't care about bottom-ticking the market, we care about preserving capital so that when this breadth measure and the weight of the evidence turns and suggests stocks are moving higher again, we can be in a position to capitalize on it.

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Thanks for reading and let us know if you have any questions!

Allstarcharts Team