Timing When to Scale In

Boy, what a dreadful year so far for the long side. But is it getting so dreadful that it might be time to start buying?

I pulled up the trusty "T2018" chart, which notes the percentage of NYSE stocks over their 40-day moving average. Instead of looking at it from an outright buy/sell perspective, I started viewing it as a timing tool to figure out when to scale in and out of the long side. In some cursory testing, if you had scaled in and out at the approximate percentages I note on the chart below, I think you'd have done extremely well throughout this bear market.

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As you can see, when the percentage number rises above 70%, that's a good time to be 100% in cash. (This past Jan. 9 was a good example.) Conversely, when the number reaches about 18% or 19%, that marks at least a temporary bottom in many markets, so you'd want to be 100% invested. If we get a horrible selloff and the percentage drops to single digits, then I think you'd want to up the ante and be 200% long.

Relating this to today's happenings, the chart tells us that you'd now want to be about 50% long. A further drop, and you'd start to edge toward being fully invested. I'll keep you regularly posted on the numbers!

Today, the Nasdaq, Masco (MAS - commentary - Cramer's Take), BEA Systems (BEAS - commentary - Cramer's Take), IBM (IBM - commentary - Cramer's Take), Education Management (EDMC - commentary - Cramer's Take) and Avid Technology (AVID - commentary - Cramer's Take).

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Charts produced by TC2000, which is a registered trademark of Worden Brothers Inc.

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And that is the final word from Francis Hammond Middle School, where loyal readers will remember that I was preparing to compete in the father/daughter event in the Mid-Atlantic Erg [indoor rowing] championships a week ago. Now, with my usual diligent prep, I figured we needed to row the requisite 500 meters in about three minutes and 30 seconds, as that's the time that won it last year. I figured if Katherine could do her part in under 1:50, I could work my way around to a 1:40 and we'd have a good shot at the gold.

Of course, that sounds easier than it looks, and Katherine had already rowed earlier that day in the high school event. (For the record: 18th out of 121 -- not bad for a sophomore. And while I'm at it, my show-off wife placed fourth in the Senior Women and -- ho hum -- had a time that ranked in the top 10 in the country for lightweights.)

Anyway, Katherine, bless her soul, goes out in 1:49, and I get on board. At this point, we're about seventh, as some teams had the father start first. Adrenaline grabs me from the start, and I'm at a 1:30 pace. Whoa, way too fast. I back down to a 1:37 pace and we slowly move up from sixth to fourth to third -- and I'm within 10 meters of the lead boat... and I just didn't have anything left. My piece ended up being about 1:39 and change, as we smoked in at 3:28.8, right where we wanted to be. Unfortunately, that was four seconds behind the winning team and two seconds out of second. (It should be noted that the father on the winning team was second in the Senior Men, rowing a time I can only dream of!)

I'm already in training for the '04 championships. We'll be back faster and stronger!

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Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Smith writes a daily technical analysis column for RealMoney.com and produces a daily premium product for TheStreet.com called The Chartman's Top Stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback to Gary B. Smith.