Given the market’s day-today volatility, it’s no wonder your clients are upset. Perhaps you may even feel atypically confused. But there is a long-known method that eases the daily uncertainty about where the market and its components are going: the moving average of prices.
A moving average indicates a market trend over the time period it covers. Most useful to investors are the moving averages that cover six to nine months of activity. On a daily basis, the most popular is the 200-day moving average.
You don’t have to get swamped by daily data if you wish to monitor some market indicators. You can do it once a week, using either a 30-week or 40-week average, which are the most useful to analysts.
The chart (at right) presents 40-week moving averages of the S&P/TSX composite index and its major components through 2011. The lines show the trends: rising, dropping or flat. These trends are the significant feature. The numbers on the scale show the differing relative levels for each subindex.
Three subindices have been adjusted to fit the chart. The S&P/TSX composite index and the S&P/TSX capped diversified metals and mining subindex have been adjusted downward by division, and the S&P/TSX capped telecommunications services subindex has been adjusted upward.
The first thing that strikes the eye is the recent decline in the S&P/TSX composite index’s average, the result of November’s market slide, when worries about Europe’s debt crisis were paramount.
You can’t miss the drop by the S&P/TSX capped energy subindex. There also are clear drops in the price trends of the S&P/TSX capped diversified metals and mining, S&P/TSX capped consumer discretionary and S&P/TSX capped financials subindices.
On the rise are the S&P/TSX capped consumer staples, S&P/TSX capped utilities and the S&P/TSX capped telecom services subindices. The S&P/TSX global gold subindex has been waffling; this is either bullish or bearish, depending on your view of gold.
These moving averages smooth out the daily hubbub and point you to the direction in which you may want to take your clients’ portfolios. IE