Identifying Trends in the Market

As market strategists and asset allocators here at LPL Research, we use many tools to assess market direction.  On this week’s edition of LPL Street View, Chief Investment Officer and Director of Research Marc Zabicki looks at one tool we use to pinpoint potential changes in market direction. 

If you are an asset allocator or portfolio manager, applying both fundamental and technical analysis is a must.  The technical analysis part of that equation often comes down to identifying trends in the market across all asset classes.  LPL Research employs a technical concept called “trend following” and combines that analysis with other technical information to potentially help identify the right investments at the right time. 

There are multiple ways to identify trends, and we employ many technical indicators.  Perhaps one of the easiest ways to help identify trends is to use price moving averages. 

An example of this is the S&P 500 Price Index plotted against the 20-day, 50-day, and 100-day moving averages of that price series.  Through 2020 and 2021 the index price and the moving averages were in sync, and shorter-term moving averages general stayed above the longer-term moving averages—a bullish sign identified by green arrows in the chart.

However, when the 20-day moving average crossed below the 50-day and the 50-day crossed below the 100-day moving average, it signaled a pending change to the S&P 500 trend.  We can see that detailed on the chart by the smaller red arrows.  The downtrend here is highlighted by the yellow arrows.

Most recently, a positive cross of the 20-day moving average over the 50-day moving average may signal a positive directional change in price.  Though we’ll have to see how these moving averages and other indicators develop before we can make a more definitive call, this positive moving average crossover may be a positive sign.

In addition to following all the economic, earnings, and other fundamental news that we can at LPL Research, we believe it is also important to pay attention to technical price factors as they change.  We believe the combination of it all helps us do our job better and may make for better investment decisions.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth in the podcast may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. All indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index data is from FactSet.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This Research material was prepared by LPL Financial, LLC. 

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