A major stock market decline is likely to be ahead of us in the short to medium term. This is not something that I am afraid of or want to avoid. Quite on the contrary, I am looking forward to it. Cheaper stocks usually means bargain hunting for high yields.

So what makes me think we will see another “crash” or substantial downturn in the stock market? Usually my argument would begin with the fundamental outlook with extreme debt burdens resting heavily on both public and private shoulders worldwide, combined with banks continuing their fantasy bookkeeping and high unemployment numbers. Here, though, I will lay forward a technical view.

Most technically interested traders pay attention to the relation between the 50 and 200 day moving average on the major indicies. If the 50 crosses the 200 from above, it is called a death cross. It is supposed to be an alarm bell for a bear market (stock prices will go down). Likewise, if the 50 crosses the 200 from below, it is seen as the start of a potential bull market (stock prices will go up). But this technical indicator also gives false warnings sometimes.

To me, as a long term investor, 50 days is a short period of time. Therefor I prefer to look at the relation between the 20 and 50 WEEKLY moving averages. If the 20W crosses the 50W from above with more than 1,5 %, it is a rather credible indicator stating that stock prices will go down in the short to medium term. Last time that sell signal was given was in early February 2008. We all know what followed afterwards.

Last time a buy signal was given (the 20W moving average crossed the 50W from below) was in August 2009. Since then, markets have gone up. But lately the 20W has begun to decline and is now approaching the 50W from above. It is still some weeks left before it is likely to cross it, but with the 50W still rising and the 20W declining, a major move upwards is needed to avoid this to result in a long-term sell signal. Currently, the S&P 500 is trading below both the 20W and 50W averages and seems to have a difficult time to break through the resistance. The 200W average is also declining.

But why am I interested in this? Am I not a long term dividend investor who holds stocks practically for life and reinvests dividends? Yes, I am. But I still want to have the overall market outlook in mind when I choose when to add to my portfolio or reinvest my dividends. The lower the stock price, the higher the yield.

So when most other people trading stocks begin to panic and sell their shares, I smile and start to consider buying. Likewise, while they have been cheering and pumping up the markets and screaming to everyone to buy, I have hoarded cash to have dry powder to use once they throw their stocks at me.

Therefore, what is a sell signal to most people is a potential buy signal to me. Not at once, not all in, but increased monitoring of bargains and gradually scaling into attractive positions to hold on to and milk the dividends from.

So, should we see another stock market decline or even collapse, enjoy! The shares you are already holding will most likely go on paying you a dividend, so hold on to them and use the dividend you receive to go bargain hunting! What do you think about the market development?