Dead Money

Dead Money

June 24, 2018 Off By Chuck

Those that have followed me for a while know I frequently use the 200-day moving average (DMA) in my analysis to assess the direction of the trend. If the average is rising, we are in an uptrend and want to stay in that investment as it will likely bring higher prices (and further gains). On the contrary, if the average is falling we want to avoid the investment as it will likely lead to continued lower prices and losses (unless you happen to be short the position).

But what about the other option where the average is moving sideways? A good example of this can be seen in the chart of Starbuck’s, SBUX, below.  You can see the (red) 200 DMA flattened out in April of 2016 and has gone nowhere since (a more than 2-year period). The stock is actually down more than 12% since that time, mostly due to last week’s double-digit decline. The US SP500 index, in comparison, is up more than 35% during that same period.

As investors we are risking capital for one reason only, to make money. A rising or falling 200 DMA provides environments in which investors can do exactly that. A flat one, on the other hand, is one to avoid as investment capital becomes dead money

As a side note on SBUX, if price breaks and holds below that very significant green horizontal line of support, a new downtrend will have begun and the first likely target of the decline will be at T1.