What the Dow’s losing streak is telling us By Mark Hulbert | March 28, 2017
Sinking stocks staying above 200-day moving average — for now
Despite suffering its longest losing streak in six years, the Dow Jones Industrial Average remains well above its 200-day moving average.
That used to mean we could breathe a sigh of relief, since it would mean that the stock market’s major trend remains up.
I’m not sure we can take much comfort from that now. The Dow’s DJIA, -0.22% 200-day moving average has a checkered long-term track record at best, and its performance has deteriorated markedly over the past two decades.
Though the 200-day moving average has beaten a buy-and-hold strategy over the last 90 years, there were several lengthy periods — each lasting more than a decade — in which this moving average caused investors to do worse than they would have done by simply buying and holding. So even on the assumption that the 200-day moving average will work as well over the next 90 years as the last 90 — a big if — the indicator provides investors with little short-term assurance as to where we are in the market cycle.
Take the last year, for example. As you can see from the chart above, the stock market twice has violated its 200-day moving average and each of these instances turned out to be the end of a period of weakness rather than the beginning of a major downtrend.
In any case, there’s also a big question as to whether moving averages have lost their effectiveness. Blake LeBaron, a finance professor at Brandeis University, has extensively analyzed various technical analysis strategies including moving averages. He points out that in the early 1990s moving averages stopped working in both the stock market and the foreign exchange markets. That increases the likelihood that we are experiencing something more than just another of the same kind of lengthy past periods in which the 200-day moving average didn’t work.
What might that something be? LeBaron speculates that one culprit might be the 200-day moving average’s increasing popularity. As more and more investors begin to follow a system, of course, its potential to beat the market begins to evaporate.
A famous newsletter turns 40
That brings me to the 40th anniversary of the newsletter that probably did more than anything else to popularize the 200-day moving average: Doug Fabian’s Successful ETF Investing. This service was created in early 1977 by Doug Fabian’s father, Richard Fabian, when it was called the Telephone Switch Newsletter. Doug retired just this month, when he handed the reigns over to Jim Woods.
Fabian’s claim to fame was a disciplined adherence to a 39-week moving average, which is essentially the same as the 200-day moving average. For a few years after I began monitoring this newsletter in 1980, the approach was quite successful, and Richard Fabian boasted that it would continue doing so into the future. He even assured followers that his system would produce a 20% annualized return over any given five-year period.
A funny thing happened on the way to the bank, of course. When Richard’s son Doug took over as editor in the early 1990s, the letter became less tied to the 39-week moving average. Doug is to be commended for doing so, in effect realizing in advance that the next couple of decades would not be a period in which this indicator would be as helpful as it had in the past.
But the shift away from the 39-week moving average also represented a shift away from the investment discipline that it imposes. And, according to the Hulbert Financial Digest, this newsletter over the last 20 years has done less well than it would have had it persisted in a strict adherence to the 39-week moving average.
So there are dual lessons here: Nothing works forever, and investment discipline is a virtue. Putting those lessons into practice can be difficult, as they sometimes point in contradictory ways. But they underline just how tough it is to beat the market.
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