“… a death cross has been a good indicator to tell us that investors should be out of the market,” says an August 12 Barron’s article by Michael Kahn.
Then came the qualifier:
Unfortunately, since the financial crisis and intervention by the Federal Reserve, death crosses and their inverse “golden crosses” have been less effective in predicting major trends. There have been several occasions when crosses are immediately reversed leaving investors with losses.
We concur.
Katie Stockton of BTIG goes further in the death-cross debate. She has given us permission to quote her.
The Dow Jones Industrial Average has received renewed focus this week because it has registered the dreaded “DEATH CROSS,” where the 50-day MA crosses below the 200-day MA. Some would add a filter that requires the 200-day MA to be pointing lower for a true Death Cross, and this is something I would recommend, noting that it is more often BULLISH in a bull market.
Katie was with us at Camp Kotok this year. Her morning missive is thoughtful and helpful and she shows a cool head in dealing with market technicals.
We are not selling because of the death cross. Nor would we be a buyer because of a golden cross, although we think the golden cross carries a stronger message than a death cross. The key is in the major trend, and it still seems to be up for the US stock market. We are staying with our intermediate-term forecast of 3000 for the S&P 500 Index by the end of the decade. We first made that projection when the S&P was a thousand points lower, and we haven’t changed it. The major trend is up for US stocks. And we see the trend supported by the slow, gradual recovery of the US economy and by low interest rates and low inflation.
Abnormal Circumstances
This is a tough seasonal period for the US stock market under normal circumstances. And it occurs now in the third year of the US presidential election cycle, when political nonsense and uncertainty creates a silly season. The clown this year seems to be the buffoon Trump. No supporters of Trump surfaced at Camp K, and the majority of the folks there leaned toward the Republican side. The Democrats at Camp K were positively gleeful about having a clown in the race.
We are dismissing Trump as the victor in the 2016 election and do not expect to see him occupy the White House. Were Trump to emerge as a leading contender to actually win the election, we would consider that a serious sell signal.
David R. Kotok, Chairman and Chief Investment Officer