Market Direction Nearing a Turning Point

Typically, when every headline and TV show leads with market coverage -- whether it's passing a benchmark level on the upside or getting crunched on the downside -- the markets are close to some form of directional change.

For example, I logged on to AOL this morning to be greeted by the headline "Is there any hope?" Also, when I was watching the Sunday talk shows, I was stunned to hear Richard Grasso, chairman of the New York Stock Exchange, proclaim that historically, when Friday is very weak, Monday is likely to be a bad day. I wasn't stunned because he's wrong but because anyone who does interviews should know which quote will be carried for the rest of the day. That particular quote doesn't instill confidence in the system at the very time we need it.

Now that the market, as measured by any index, is making multiyear lows, when should the bleeding stop, and where can some form of recovery take place? Because very few indicators have worked in trying to call the proximity of the low, I had to pull out the big guns and go to the archives to find what has worked best during times of total uncertainty. I found the following information:

The S&P 500 is now 22.5% below its 40-week (200-day) moving average. Since 1963, where my data begins, this index has been more than 15% below this moving average on only five other occasions. (See the table below.) The average decline below the long-term moving average those six times was 22.9%, with the worst case being 29.6% below in 1974. This means the index has roughly 7% risk from current levels.

This is a special free look at Tony Dwyer's commentary. Want to read more of what Dwyer thinks about this market? Find out by clicking here for a free trial to RealMoney. Once you sign up, you can read the rest of Dwyer and all of our premium content.

>To order reprints of this article, click here: Reprints