If you follow the stock market, you know that last week stock prices fell quite a bit.  In fact prices fell so sharply that the Dow Jones Industrial Average (DJIA)  is now below its average level calculated over the prior 200 days.  For some people, crossing this threshold implies that the market is now a dreaded bear market.   So the website, MarketWatch asked What does breaking the 200-day moving average for really mean?   To answer this question, they consulted Professor Blake LeBaron.  To quote from the article

One important straw in the wind in this regard is research conducted by Blake LeBaron, a Brandeis University finance professor. He found that moving averages of various lengths stopped working in the early 1990s not only in the stock market, but also in the foreign-exchange markets.

Since those two markets are not linked in any obvious way, that would otherwise explain why moving averages would fail simultaneously in both. LeBaron’s research provides support for those who believe that the moving average’s fading effectiveness is more than just a fluke.

What might have caused that to happen? LeBaron speculates that it could be the confluence of several factors. One big one, he told me, could be the advent of cheap online trading, especially the creation of exchange traded funds — all of which made it far easier to trade in and out of securities according to the moving average.

Another factor, he said, could be the moving average’s popularity. As more investors begin to follow a system its potential to beat the market begins to evaporate.



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