Death Cross History

The death cross is interesting not because it has much predictive power but because it has been widely perceived as predictive, and can spook the herd. Yet I wonder if in the age of the Internet is the herd so easily moved? Whereas in the past (about a decade ago!) investors would be heavily influenced by brokers, or simply rely on mutual fund managers, today there is a great flood of commentary pummeling the attentive. In the past week there has been a stampede of death cross comments, most of which pointing out its self-congratulately character: when the cross occurs, the trend is already pretty clear, so what does it add? 

 

The last Death Cross occurred in Dec 2007, right at the start of the big drop; and the last Golden Cross happened in June 2009, shortly after the Hope Rally kicked off, confirming a longer trend up. In both cases it would have given guidance to ride the trend. Many clever contrarians who thought the Hope Rally would end at its first peak in June 2009 were shown up fairly quickly; and the great mass of fervent fundamentalists who dismissed the warning sign in late 2007 lost an Ark's worth of wealth over the next year. With recent 20:20 hindsight, the Crosses look pretty useful. 

This hasn't stopped the fundamentalist sheep dogs trying to keep the herd away from technical analysis. The WSJ proffered a debunking a few days ago, using an interview with Pierre Lapointe, global macro strategist at Brockhouse Cooper, who said:

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.

This morning they had a slightly less breezy market note:

Such a death cross has also marked every other bear market since 1972, notes Ed Yardeni, president of Yardeni Research. And the market's 50-day average is currently less than 1% above this tipping point.

Dow Jones ran a more considered piece that look into the stats, concluding:

There have been nine occasions when the 50-day moving average crossed the 200-day moving average since 1998, and five could be considered false signals. One might say they seem pretty good at marking contrarian turning points.

The particular market analyst went on to note the bigger head & shoulders pattern shown in my prior post, and added that breaching the neckline (which we have done) with the death cross pretty well confirms a deeper drop. Overall the point was that a Death Cross in itself doesn't say much (other than that the herd might be spooked) but in concert with other indicators can give guidance. I agree with that - none of these indicators in isolation is worth that much, but the bundle of indicators can predict market direction. What I get amused by in this case is combining the self-congratulatory Death Cross with the often-seen and seldom-realized head & shoulders: dumb and dumberer so to speak. 

But if they spook the herd, they can be acted upon. We should get a really good test in a couple of days: will a Death Cross spur a bearish dump? Or, if the Internet has leveled the paying field between "experts" and investors, we might see the herd fading the experts, in effect betting for a bounce just when the "experts" say they should be spooked. 

Over at The Big Picture, from the Chart Store we have some deeper stats on Death Crosses. Two charts are presented, one where the 200 DMA is still rising (as it was in Dec 2007) and other where it is falling and the 50 DMA catches up (as we see now):

  

If we return to Pierre's comments on the Death Cross, he does add that there have been nearly two dozen death crosses over the past four decades, and the S&P has declined by 0.4% on average one month after such a formation. After six months, on the other hand, the market on average had gained nearly 5%. Here is how he continued:

Fundamentals is the only way to go… until risk moves investors’ attention away from them. And this is where we stand right now. Risk is dominating. The global economy is in much better shape than it was in 2007 before the credit crisis and global recession: home prices are much lower and less of threat; mortgage rates are at all-time lows; and companies are back in hiring mode (albeit at a slow pace). But investors are parked on the sidelines.

Funny comments! The world is in better shape after the greatest drop since the 1930s in the global economy? Such is the wisdom from fundamentals. The corner is always about to be turned. 

In bull markets, investors rely on fundamentals - why not? everything is going up. In bear markets, they turn to technicals - especially when they get tired of being told to buy the dips because happy days are almost here again. At a real bottom they don't listen to the siren calls of brokers at all, and that is the time to buy back in. 

Comments

[da bear]

here is what I posted yesterday:

Mickey D.,

yeah, this could be a biggie bad bear market. Like Millennial Wave 4 instead of Grand Super Cycle Wave 4.

Well, let's just go with the Financial Forecast alternate count tomorrow and call it a day.

da bear

P.S. An 'e' of 2 up starting tomorrow would fool everyone, but the count would look totally screwed up. But the flip side is that the start of 3 of 3 of 3 of 3 of 3 of 3 of 3 of 3 down would be the 'F' wave. lol
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i think the market can rally higher if DOW 9,500 holds. If Gold $1,200 holds.
The alternate count is showing the 10,592 high as wave C so this current wave lower is wave 'd'. Wave 'e' up to follow. but DOW 9,500 needs to hold, along with that $1,200 in gold. For this to be 3 of 3 of 3 of 3 down the downside action isn't as severe as it should be.

Also, the DOW rallied from July 4th 1930 into Labor Day before the market collapsed again.

Yesterday, with everything down, the dollar was lower too. Not a good sign for the buck. Stocks were down but they did not collapse. That is bullish sorta.

Gold $1,300 and DOW 10,666 is still possible.

Let's see what happens on Tuesday.

Once again, the alternate count on page 2 looks to be correct. Instead of the wave 2 high it instead wave c of 2. So 'd' down is here. ... basically it is what I was calling for.

Also, they changed the 'flash crash' to the wave 3. the snap back was the wave 4. That is my count. Dunno when they changed theirs, but I guess they did. I explained about the '3' down earlier. If you want a rehash I will post my own Report tomorrow on my message board.

da bear

[Roger D.]

Looks like a double x in the SPX and a wave 2 in the transports. Will it stay up into the close??

[Roger D.]

The pen-ultimate bull trap.

[da bear]

how about an 'F' wave this fall? lol

da bear

[da bear]

In 1930 the stock market made a secondary high in the spring then went sluggish and sold off into July 4th.
The market then staged a rally into Labor Day.
That could happen here. An 'e' of 2 rally. The alternate count from EWI would prove correct yet again.
I am looking at gold and it appears to have dodged a big bullet -- if $1,200 holds.
Here is a link to the chart of gold from the $1,040 low in February. I think that that was the wave 4 of B low. Since then we have been in wave 5 of B off the Fall 2008 lows. Wave ii low in March then the wave iii of 5 rally into May (new nominal highs), then the a of iv low at $1,170ish, a 'b' of iv rally into a double top then the 'c' of iv to $1,200. The current v of 5 will go to around $1,300. $1,170ish needs to hold. A v of 5 of B high would take silver up too.

da bear

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