Wednesday, September 24, 2014

Equities: "All Death Crosses Are Not the Same"

Please note: we did not bother gentle reader with Death Cross posts last week.

No, we went with "You Can Read about the Fed or You Can Read 'Randy Eurasians Surprise Scientists With Ancient Sex Romp'", "Oh Dear God: The IMF's Christine Lagarde Will Belly-dance to Achieve Her Goals" and "Things I Cannot Do, Part ∞, Sound like a distorted electric guitar playing Led Zeppelin's Whole Lotta Love".

Now it's time for Death Crosses.
From Dragonfly Capital:
The Death Cross in the Russell 2000 seems to be all that anyone talking about. Mostly because it sounds cool, I guess. So are you sick of it yet? Death Crosses as a trading signal are not very interesting. They lag the price action and often you will have already seen the bottom before the Death Cross occurs. But as a long term indicator they can carry some value, if you know what to look for. You see all Death Crosses are not created equal.

The Death Cross is defined as when the 50 day Simple Moving Average crosses down through the 200 day moving average. It seems simple enough to interpret. If the shorter moving average is falling through the longer moving average the price is falling and the the short term momentum is to the downside. Plenty have discussed the statistics of how the market does 3, 6 or 12 months after one so I wont repeat that here (spoiler: it is higher). But what happens in 3, 6 or 12 months without looking at what happens in between is ludicrous for a swing or position trader. Even a position trader may not be able to stomach the short term pullback, and I am sure those talking statistics are not holding stop losses that allow for a 25% decline along the way. So what can you do? Lets look at the last 4 Death Crosses in the Russell 2000 ETF, IWM, a bit more closely to see if there are some clues.
death cross 1
The chart above has the last 4 Death Crosses marked, as well as the one happening now. You can see that in all 4 cases the market had fallen by at least 7% and as much as 20% BEFORE the Death Cross. this reinforces the point that a Death cross is a lagging signal. But also in in 3 of the 4 the IWM headed lower lower by over 10%, following the Death Cross, before a Golden Cross changed the signal. The 4th time, in 2010, the move following the Death Cross was muted. What is the difference?...MORE
The market looks to be trading down over the next few weeks but truth be told, unless you are manipulating the result, no one knows.

Death Crosses over the years:
Societe Generale's Albert Edwards on Analysts as Leading Indicators (and something about us approaching the Ultimate Death Cross)

Ummm... Regarding Albert Edwards and the "Ultimate Death Cross", Never mind

Praise Be! The U.S. Market Has Narrowly Avoided Albert Edwards' "Ultimate Death Cross"

Everything You've Ever Wanted To Know about Moving Average Crossovers

Look Past the Current Crises and See.... An S&P Death Cross

"Qaddafi declares jihad against Switzerland"