There were multiple references to a “death cross” in NASDAQ-100 index in financial media yesterday, as well as, to one pending in S&P 500 index. A death cross is usually a losing proposition.
My recommendation to financial media: please stop making references to things that
- are only apparently simple
- have consistently failed in the past
- need a little more expertise to discuss
By “death cross” it is usually meant a cross of the 50-day moving average below the 200-day moving average. Why the financial media thinks this is this supposed to be an ominous sign for the market is not clear. Probably someone who was perceived as an expert declared it once and then the bandwagon effect took charge, as with many other things in technical market analysis.
Below is the chart of NASDAQ-100 with the “death cross” that occurred yesterday although the index has rallied more than 8% in the last 6 trading days:
It may be seen that by the time the death cross occurred, the index had already recovered significantly from recent correction. Obviously, this “death cross” indicator has a serious lagging problem as anyone without even the knowledge of the math can understand. However, the financial media rarely mentions this and related problems. Their only objective is to get the attention of a spooked investor or trader.
Below is the S&P 500 daily chart that shows possibility of a death cross formation:
The curve below the chart shows the projection function values for a 1-day ahead death cross. In other words, the value of the projection function is the price required to get a death cross at the close of the following trading day. In the S&P 500 case, this value is 2,314.74. This means that the index most drop next day about 17% to get a death cross! In other words, it makes no sense to even talk about a pending death cross in S&P 500 because the 200-day moving average is only about 10 points below the 50-day moving average. These averages are slow and convergence takes a long time.
However, this is what happened in mainstream financial media last week: articles surfaced that attempted to spook investors and traders about a pending death cross in S&P 500 because the difference between then 50 and 200 day moving averages was getting small. If the market correction continues, then there will be eventually a death cross. But this may take long and in the meantime there can be several rebounds.
If fact, the death cross has been a losing proposition in all four major U.S. stock indexes since 1990, as shown in the table below:
Table 1: Death cross performance from 01/04/1999 to 12/03/2018. No commissions, fully invested equity.
The most significant result is the low win rate of the death cross signal. Since markets have had a positive bias this should be expected so I cannot understand why in the financial media they keep making references to this failed technical analysis signal as it has been a money maker. But since we still see references to things like “head and shoulders” this is of no surprise. If you would like to read more about the reasons these patterns of classical technical analysis no longer deliver \you can read my interview with Forbes Magazine.
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Charting and backtesting program: Amibroker