IS THE “DEATH CROSS” A USEFUL INDICATOR?
At the March highs we were talking about death crosses. No, not death crosses in the S&P, but the death cross in the one equity index that has proven to be even remotely leading over the course of the last 5 years – China. Today, everyone and their mother is chattering about the death cross in the S&P 500. Is it of any use? Jeff Kleintop at LPL says it’s nonsense:
“While much is made of the “death cross” of the S&P 500 50-day moving average falling below the 200-day, it has actually been a buying signal during these periods in the past. A good example of this took place in 2004 when during the soft spot in the recovery the 50-day crossed below the 200-day on August 17, 2004, just as the S&P 500 had completed the low point of its soft spot pullback and embarked upon a double-digit percent gain over the next three months.”
Pierre Lapointe, a macro strategist at Brockhouse Cooper agrees:
“The death cross IS nonsense. They’re no better than a flip of a coin to predict future returns. Check out these odds: Since 1970, only 10 of the 21 occurrences actually resulted in a market pullback a month after the death cross. Three months later, the market was down only 43% of the time. With odds like this, don’t short the market. Go to a casino — you’ll have more fun.”
The S&P 500 and the U.S. equity market has not proven to be a leading indicator of much in recent years. Many even question its discounting capabilities at all. The moral of this story? Don’t wait until after a 15% decline in equities to jump on some technical analysis bandwagon. Especially one from an index that has proven to be a leading indicator of just about nothing.
Jeff K – You are right that the August 2004 cross was a fake out, but it recrossed about 100 points later in November 2004. There are no “perfect” indicators and moving average cross overs are designed to protect capital and you pay back when there is a fake out. Since we are talking about gambling, I will see you that cross and raise you the one that started December 2007 and went until June 2009 for a total of 580 points saved. Any takers?…….Big Mac
I think the 50-DMA below the 200-DMA, both of which are down-trending is a more useful indicator (of a market I want nothing to do with).
It’s only a death cross IF it crosses with heavy volume. But if people think it’s a death cross even though it really isn’t(because it occured with low volume), people will sell in fear of the death cross that really isn’t. And because it is not a death cross it is really nothing to fear, so those that know it is not a really a death cross have an opportunity to buy during the pullback from the sellers who think it a death cross. So while others think it is a death cross, you know it is a buy cross. Also, what people don’t know is that even if it is really a death cross(when the cross occurs with heavy volume) it may still not be a death cross. Yes, in 2007 a real death cross occured and stocks dropped 7.7% in the next 6 months, but in july 2006 a real death cross occured but in the next 6 months stocks rallied 15%, so a death cross may not be a death cross after all, but it could be. Just remember, For the word of the cross is foolishness to those who are perishing, but to us who are being saved it is the power of God.
Looks like the death cross / head and shoulders may a sparked a major short covering rally especially among those bears late to the party. Didn’t the negative techinicals (head and shoulders) and econimic information together with better than expected earnings result in the next leg higher in July last year. (One week later than this year) Deja vu? (Doubtful that is the next leg higher this year, but maybe 15% rally back to the highs).
Or was today’s rally just Barton Biggs buying back all the US equities he sold last week. He told Bloomberg that he liquidated all his US equities last week – an amount equal to about 35% of his total Traxis portfolio. If Barton is done buying with the market fall back down 3% tomorrow?
Regarding the “death cross” on the Shanghai index discussed in March. The death cross occured on March 24. Immediately thereafter the market rallied and stayed higher for 3 weeks. (Rally was only about 2% immediately thereafter and reached just over 3%). The market is now down 24% from where it rallied to after the “death cross” and about 30% from the recovery highs made last August. A 30% decline on the S&P 500 from the April highs would be to about 850 (close to long-term fair value). A 24% decline from the post death cross highs to 850 would imply a near-term rally back to 1120. (The magically 50% retracement level).
In December 2007, the marketed rallied very briefly following the death cross. The market was rallying back from mid-December lows near the November lows near 1450 when the death cross occured. The rally from just preceding to just after the death cross was about 3.5%. The market declined 30% from the October 2007 high to 1,100 and declined 24% from the post death cross high to the pre-crash low of 1,100. (The primary crash being the one week decline of 22% from Oct1 to Oct9). Funny how the market seems to come back to 1,100 again and again.
The “death cross” may mean nothing since a significant decline following a death cross only occurs about 50% of the time (hardly predictive). On the otherhand, today’s 3% rally may be just as meaningless. Amazingly the 10year note stayed below 3%.
Not much of an analyst to be putting down an indicator because it is not right 100% of the time. 43% being right as an indicator is a pretty high percentage for an indicator. Besides which there are about a hundred other major issues out there right now that could by themselves tank this market.
I was truly embarassed after the close today for the pundits pontificating on the market prognosis on CNBC: we saw chief strategists from prominent brokers (Eric Ross, etc…) prattling on about the “death cross,” and how that was invariably bearish for equity markets.
If it was that easy, we would all be rich!
Do these people think they are actually adding value by gazing at a chart that a well-trained monkey could interpret, and making predictions thereupon?
Nice work if you can get it!
Don’t know what kind of cross this analyst considered, but if the “Death Cross” or the “Golden Cross” is defined on the 50/200-day EMA its record is perfect going back 15 years. It kept you out of bad market segments and into good ones with only minimal lag provided the market is trending, which it nearly always is. These indicators are as good or better than any I have seen.
I should add that the above opinion is based upon 50/20-day EMA on SPY. Can’t speak for or against its use with other indexes.