At 720 Global we follow a large number of fundamental and macroeconomic indicators to help forecast the markets. In addition we also monitor technical indicators to gain further confidence when making market forecasts and assessing the likelihood of outcomes. Although we do not spend much time writing about technical analysis, we view it as an important tool in evaluating human investment behavior.When technical indicators line up with the fundamental metrics, the reinforcement provides a greater level of confidence in the analysis.

We  will highlight a simple technical indicator that has proven prescient over the last 15 years.Currently, this indicator supports much that we have posited regarding equity valuations and what they portend for the future direction of prices. 

Moving Averages

Moving averages are the average price at which an index or security has traded over the last number of days, weeks, months or even years. For instance, today’s 20-day moving average for the S&P 500 is its average closing price over the prior 20 days. Many investors use moving averages to help gauge where a security or index may encounter support or resistance. Due to the widespread use of moving averages it is not uncommon to see prices gravitate toward moving averages.

Another way investors employ moving averages is to compare them across different time frames. For example, an investor may compare the 20-day moving average to the 50-day moving average. It is said that when a shorter term moving average is higher than a longer term moving average the underlying stock or index has positive momentum and vice versa. Therefore, when short term moving averages cross to the upside or the downside of longer term moving averages it can signal an inflection point where momentum has changed direction.

20/10

The indicator that is currently catching our attention, and may be worthy of your attention, is a comparison of the 10-month and 20-month moving averages on the monthly S&P 500 index. Monthly moving averages are similar to the aforementioned 20-day example but instead of daily closing prices, monthly closing prices are used.