by Archie M. Richards, Jr.
June 19, 2006

On Monday, June 12, when stock prices were at their lows, Lena emailed, "The current market downturn is depressing. Your asset allocation plan has worked beautifully to this point, but my gains are now evaporating. My retirement is only 15 years off. Should I have sold when my exchange-traded funds broke through their 200-day moving averages?"

Never mind 15 years, Lena. It'll probably be decades before you'll need to spend significant amounts of your investment money. Short-term swings now don't matter.

The idea that economic growth throughout the world will now come permanently to a halt is ridiculous. When you need the money, it'll be there in spades. If you've allocated your ETFs among various asset classes, you have the best possible growth potential with the least possible fluctuation. But expecting no downside moves is unrealistic.

I realize it's not easy to disregard current swings. We live in the now, when we can't help but absorb current sentiments. It helps to turn off the tube during the 6 o'clock news hour.

As you know, a 200-day moving average is represented by a line on a chart showing the average of the closing stock prices for the last 200 days. Each day, the price from 200 days ago is removed from the average, and the previous night's close is added in.

The 200-day moving average is smoother than the daily trend of prices. When daily prices forge ahead, they move above the average. Market technicians, who think historic price and volume trends have predictive value, take this as a signal to buy.

When daily prices drop sharply, they move below the average. Technicians take this as a signal to sell.

But all too often, the daily prices poke their heads above the 200-day average and immediately fall back. The technician buys, only to sell soon thereafter for a loss.

Using moving averages doesn't improve results. Too many whipsaws occur, and every trade incurs transaction costs.

Lists of millionaires don't include market technicians whose money wasn't inherited.

In last week's column, I said that the selling that took place on Thursday, June 8 was a mini-panic. I urged those who had sold to buy in again immediately.

The next day, Friday, June 9, and again on the morning of Monday, June 12, prices rose nicely. But right after I submitted my "buy-in-again" column to newspapers on June 12, the prices started down. On June 13 and 14, they fell below the lows attained during the panic on June 8.

In the back of my mind, I could hear disappointed readers say, "You lunkhead! After you recommended buying, prices dropped to new lows!"

This would be my response: During panic selloffs, investors get caught up in the pessimism and sell on huge volume (3.5 billion shares on June 8, almost a record). These are the only occasions when stock prices become predictable for the near term. You can be pretty sure that the pessimism is overdone and that the market will start rising soon.

But not necessarily immediately. Last week, Ms. Market decided to hack around on the downside for a few days and scare investors a little more, before rebounding sharply on June 15.

Economic growth is not screeching to a halt. The Federal Reserve will succeed in corralling inflation without creating a recession. Companies are spending heavily on capital improvements. They're also buying their own stocks in big numbers, reducing the supply and increasing the earnings per share.

In my last yearend review (the column dated 1/2/06), I predicted that stock prices would begin rising substantially at around midyear, 2006. That time is now.

In the long run, the creation of wealth by the people of the world, when unhindered by government, makes stock prices rise.

Short-term moves you can forget about. But if that's impossible, take panic selloffs as a signal to buy, not sell.