With the market struggling over the past few months, you might be wondering whether to lower your stock holdings. You can keep an eye on two things that can save your portfolio. Both are moving averages on the S&P 500.
The first one is the 20-month moving average, which measures the average closing price for the past 20 months and then plots it as a line on a chart. Should the S&P close below the 20-month moving average this month, it would be a bad sign for the market. In 2000, the S&P closed below the 20-month in November and then proceeded to drop another 40 percent. Had you lowered your equity holdings in November when the 20-month was broken, you would have saved yourself a lot of pain.
The second one is the 100-week moving average. If you are feeling skittish about the market and the economy, keep an eye on this. It could be a heads up for what happens with the 20-month moving average. (Because the readings on the 100-week can be calculated weekly rather than monthly, you will get a bearish reading earlier than you would by waiting until the end of the month.)
Should you see the S&P close below either of these moving averages, you will want to lighten up on your stock holdings and increase your fixed-income holdings. Right now, the S&P is below the 20-month and above the 100-week.