Friday, August 12, 2011

La Cruz de la Muerte

I am trying to be like the rest of the media with catchy headlines but in Spanish or English, the stock market now has a black, or death cross in place in a growing number of sectors. The S&P 500, Nasdaq and Russell 2000 all crossed to the downside just today. The Dow is close.

Wednesday's column covered sector crosses. Let's step back for a second to explain what the heck I am talking about for those of you who are new to technical analysis jargon.

A black or death cross occurs when the 50-day moving average crossed below the 200-day average. Conversely, a golden cross happens when the 50- crosses above the 200-day. The point of using two moving averages is that the signals are fewer but much more reliable.

But as moving averages, they necessarily lag the market and will never, ever, catch the top or bottom. That's for other indicators. The crossover, however, does a nice job of getting you on the right side of the major trend and when I say major I mean cyclical bull or bear market.

Right now, the crossover tells us it is a cyclical bear in its early stages.

The next question should be "So how come it failed miserably last year."

As my source said in the column, nothing works all the time. That is why we never depend on one indicator. However, the price for being wrong was minimal. The price for not heeding the message if it is correct is huge.

I looked back through time and there were other small whipsaws. But when I switched to exponential moving averages the track record was better. For example, they were not fooled in 2006 when the market looked like it was lapsing back into the bear.

Which do you believe? As with other battles of indicators (linear vs. log is a good example) you use both. Then figure out which one has the weight of evidence behind it from confirming indicators.

FWIW - the exponential version has not yet had its death cross. But even a total reversal of the entire month's decline will not avoid the mathematics that say it is inevitable.

 Only you can prevent portfolio fires.
Smokey the Bear, CMT

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