Murphy's Technical Bear Strategy

02/21/2003 12:00 am EST


John Murphy

Head Market Analyst,

John Murphy has been a leading technician for some 30 years, including seven as the technical analysis on CNBC. He is also the recipient of the 2002 Market Technicians Association Annual Award. In addition to his money management operations, he now features his technical work on the online site,, as well as . Here, he explains his strategy in bearish periods.

"We show a red 200-day moving average on our daily charts and a (blue) 50-day average. While the 200-day line is used to determine the major market trend, the 50-day line is used more for trading (timing) purposes. The Dow closed decisively below its blue 50-day line on January 21 at 8442. That's over 500 points above today's price. We've been on the defensive ever since. It's a simple timing tool, but it works. The chart below shows the Nasdaq with a simple 50-day average for the past year. It's pretty clear that a 'buy and hold' strategy didn't work. The simple technique of selling under the 50-day average wasn't perfect, but it saved an awful lot of money.

"They say you can't time the market. Not according to our statistics. In the 30 years from 1972 to 2002 a 'buy and hold' strategy reaped a gain of +1,105% in the NASDAQ. A simple timing strategy of selling whenever the Nasdaq fell under its 50-day average (and re-entering when it rose back above it) reaped a profit of 13,794%. In the ten years from 1993 to 2002, a 'buy and hold' strategy yielded a NASDAQ profit of 93%. By utilizing the 'sell discipline' of the 50-day average, that NASDAQ profit jumped to 280%. That's why we keep such a close eye on it. It's proven very useful lately.

"At MurphyMorris Money Management, we often use a 'short fund' to protect existing long positions in our managed accounts. Since December, we've owned the ProFunds Short Small Cap Investment Fund (SHPIX ). The fund crossed over its 50-day average in mid-January. At the moment, about half of our invested capital is 'short' the market and the other half is 'long'. In other words, we're in a neutral posture. While it hasn't made us much money so far this year, it has kept us from losing any. We're content with that. There are times to make money--and times to keep it.

"We've been making the case recently that a generational asset allocation shift appears to be taking place out of paper assets (mainly stocks) into hard assets (commodities). Over the past 20 years, paper assets were clearly the place to be as commodities consistently underformed stocks. However, the CRB Index has been outperforming stocks since 1999 and, more importantly, the ratio has broken the 20-year down trendline. These long term shifts between asset classes tend to last for a long time. That's why we still believe that a good asset allocation play is to build up positions in hard assets (preferably during period of weakness). That can be done via sector mutual funds that emphasize commodity-related stocks or commodities themselves. The Oppenheimer Real Asset Fund (QRAAX ), which mimics the trend in the Goldman Sachs Commodity Index, is one way to participate in a bull market in commodities without actually buying the commodities. We also feel that any significant setback in gold and gold stocks would represent another buying opportunity."

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