Last Week’s Death Cross

18Aug11

I’m a bit late in writing this (apologies), but Thursday of last week the S&P 500 made a “Death Cross”.

This ominous-sounding event occurs when the 50-day moving average crosses under the 200-day, and to some technicians it signals the start of a long-term bearish bias.

I’d like to call readers’ attention to my previous analysis on the subject. Click through to get all of the nitty-gritty numbers, but the basic conclusion is that:

1. The market has clearly exhibited weakness following a Death Cross, and investors of the longer-term variety should take heed. However…

2. That weakness has not (in and of itself) justified shorting the market. The market has still on average gained following a Death Cross, and without other confirming signals, long-term investors are better off simply moving to cash.

Put more simply, the Death Cross isn’t a non-event, but it also isn’t as bearish an event as some would have you believe. 

Happy Trading,
ms

Side note: some interpretations require that the 50 and/or 200-day MA be falling to call a Death Cross. This additional rule increases the bearishness of the Death Cross, but also greatly reduces the number of days that qualify as a Death Cross.

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5 Responses to “Last Week’s Death Cross”

  1. 1 Jay

    At some point your TAA model should go to cash with regard to equities, is that correct? (I realize you may use a different timing model than the Ivy Portfolio, but I expect you to go to cash soon on stocks if this selling keeps up.)

    • 2 MarketSci

      Hello Jay – that’s correct – last time I looked, if the month was to end today, we would be holding 1. gold, 2. a big Treasuries position, and 3. a small real estate position going into next month (much more defensive than our current allocation). Of course, how the rest of this month plays out may change that and we may not even hold that small real estate position.

      P.S. the model has held up nicely this month despite it’s very balanced positioning. I want to see that hold until month end. michael

  2. 3 Emil

    We’ve been missing your posts, how have you been? Is volatility trading treating you well?

    • 4 MarketSci

      Hello Emil – things are good here – thanks for the kind words. I’ve been getting the itch to post a bit, just waiting until I can commit to it for longer than a single post =) Vol trading has been very good. Things got quiet there for a spell when the term structure began to flatten out and I went roughly a month without taking a significant position, but now that we have some direction, I’m off to the races again. michael

  3. 5 Emil

    Nice to hear, feel free to do a state of mean reversion report. With the bear market approaching I would think that swing frequency would be going into high mode.
    Best,


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