How to chop up your portfolio - The Reformed Broker

You’re going to be hearing a lot about the 200-day moving average. Yesterday, the Dow Jones Industrial Average broke below its 200-day moving average for the first time since 2016. It recovered mid-day and then closed above, but still – the articles are being written as we speak.

What people get right about the 200-day is that markets tend to be more volatile when they’re below it than when they’re above it. But this should be obvious – of course things go more smoothly in a defined uptrend than they do in a downtrend.

What people get wrong about the 200-day is that being below it does not mean we are necessarily headed into a bear market. The slope of the average – or prevailing trend – is more important. You can have crossovers above and below over and over again and they don’t necessarily tell us anything.

In the discussion below, Michael and I look at the stats and some examples of when this signal did not do you any favors in terms of telling you when to buy or sell.

Here’s a chart of the 2000 – 2001 period when people chopped themselves up for a year and a half that Michael references…you can see all the breaks above and below that signified nothing along the way to the actual downtrend.