The Death Cross Is Back

Tyler Durden's picture

Two things should stick out at the reader upon perusing the chart below. First, inversely from top to bottom, what is rather disturbing is that the average trade block size in ES has tumbled over the past week, which we believe is indicative of the massive deleveraging hedge funds have been forced to undergo in order to not be torn to shreds by the massive volatility in the markets in the past 10 days. It also means that the marginal impact of a far smaller trade is proportionally higher than it would have been back in May when the average block size was at the highest for 2011, concurrent with NYSE margin debt and net leverage hitting fresh post-Lehman highs. As such it means that we should expect to see a 50 S&P point yoyo market for quite a bit or until such time as hedge funds relever once again, and take the marginal pressure off the momentum creating and chasing HFT machines. Another notable observation: the 50 DMA is about to drop below the 200 DMA. Another name for this phenomenon? The Death Cross. The last time this happened was back in July 2010, just weeks before the first occurrence of the Hindenburg Omen back in August 2010 which pushed the market to its lows for the year, which, among many other factors forced Bernanke to launch QE3 two weeks later. Is the Death Cross the precursor to a comparable chain of events this time around? We shall see as soon as August 26th.

In the meantime, for those wondering about the predictive power of the Death Cross, we refer to MarketWatch's Mark Hulbert who compiled the following table of market performance following the appearance of the technical formation:

His follow up commentary:

The market does tend to turn in below-average performances following death crosses; indeed, the differences in the table are significant at the 95% level that statisticians often use to determine if a pattern is genuine.


If I ended my analysis at this point, the data would point strongly in favor of interpreting the stock market's recent death cross as another strike against an already beleaguered market.


But, as Paul Harvey used to say, there's the rest of the story.


It turns out that the death cross has had a mediocre track record at best over the last two decades. To be sure, it's had some great recent successes -- such as the one that occurred in December 2007, very early in the 2007-2009 bear market. But there have been a number of other failures -- such as one that occurred in October 2005, in the middle of the 2002-2007 bull market.


Overall, in fact, there has been no statistically significant difference since 1990 between the average performance following death crosses and all other market sessions.

What has changed since 1990 to make this indicator less "predictive"?

LeBaron speculates that moving averages might have been sabotaged by too many investors trying to follow then.


Ownership of personal computers skyrocketed in the late 1980s and early 1990s, and coupled with cheap online databases, those PCs enabled a much larger group of investors than ever before to discover and quickly exploit the moving average. A dramatic lowering in transaction costs at about the same time made it much easier for investors to trade on signals generated by moving averages.


The bottom line? The weight you put on the stock market's recent death cross depends on whether you think the last two decades are a mere exception to the long-term rule -- or if, instead, you believe that something indeed has permanently changed.

Or, another way of saying it is that in the past 20 years, courtesy of the great moderation, none of the traditional indicators have worked as the one and only primary driver of market performance has been central planning in the form of cheap and relentless market liquidity.

Want to know what the market does tomorrow? Ask the Chairman (if you have access of course).

Everyone else may just take their yoyo odds to Vegas. The scenery is far better.

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BeerGoggles's picture

ZH way too bearish = buy signal.
Remember the Hindenburg Omen? Say no more.

Tyler Durden's picture

Yes, we also remember the 5% market drop following the Hindenburg Omen and the QE2 just after that.

We will say no more.

BeerGoggles's picture

5% oooh...that would be a normal retrace yeah? Fact is market went up like fuck not long after the Hidenburg omen. As any TA knows, MAs lag and a death cross now is a likely candidate for a huge retrace back up. Also, as it is being reported in the media, it means you should all get long...waaay too many bears in the market.

Rick64's picture

The point is without QE2 it wouldn't have went up like a rocket, and without QE3 it won't be going up this time.

UGrev's picture

winner.. and QE3? *crickets* *blink* *blink*

BeerGoggles's picture

Exactly. I'll be sure to bookmark this when we reach double top again and I am up a fuckload.

Market has done nothing but go up for 2 years and this site has done nothing but talk about shorting.

UGrev's picture

were you on vacation for the past few days?

TruthInSunshine's picture

Beergoggles went ultralev long in 1996, ultralev short in 1999, ultralev long in 2003, ultralev short in 2007, ultralev long in 2009, ultra lev short a 10 days ago, and he went ultraleve long again as of 4:59:99 as of yesterday.

Just like RoboTard.

UGrev's picture

Can i go on the winnernet and claim 100% success like that too? or would you just say that I was talking shit.. ? lol..

BeerGoggles's picture

It's not hard. Gold is in a bull market, you just fucking buy and hold and stocks have been going up for 2 years - it's about the easiest trade around double ETFs the lot. Buy every fucking retrace and buy every time ZH comes out with some TA bull.

Rick64's picture

So if you bought and held you are where you were 10 months ago (Dow down 1800 and ES down 200 off their highs). How long before QE3? Will it be enough or effective? It might not be too long before your right back where you started.

malek's picture

LOL - and what made you sell 3 weeks ago? ZH becoming ultra-bullish?

JW n FL's picture

you gotta get long!

Buy B of A!! Hurry man its has already started climbing!

Dont you miss the bottom!

Fuck buy on the way down!! its ok to buy on the way down! buy a lil on the way back up! Pump IT!!

The Market is where the action is! do it!

QE-3 is coming!

Austerity is coming after that!

and fires after that!!

Buy now! make your money and move far away! time is short!

SheepDog-One's picture

QE3 when we have +550 DOW up days? Wheres the dire need for that?

TruthInSunshine's picture

Awesome secular bull market...

....for 14 years now, beergoggles!

 BTFD, bro.




bania's picture

nominal values, schnominal values

Oh regional Indian's picture

All I have to say is I told you all so.


And it's not even started yet. We've seen the celebrity pitch....

Game on from August 15th. 

Au-Gusts...  ;-)





johngaltfla's picture

Put it to music like I did Tyler. It's more fun that way. Besides, most of the major DC's hit the financials months ago....

caerus's picture

death cross - best name ever

OpenEyes's picture

Mish's site just referred to Treasuries as "Certificates of Confiscation"   also a pretty good name.

caerus's picture

"certificates of confiscation" eh?  i like it...i like it a lot...

Mr Lennon Hendrix's picture

Mish...haven't read him in years.  He is still cutting and pasting?  Good to hear.

citta vritti's picture

back to the future with that one - such was their name in the fifteen years culminating with 1981, not coincidentally also the years of gold’s previous great run. I’d say, here’s to one term democrats (Obama seeming as ineffective as Carter, with the unemployed his Iranian hostages?), but if I remember correctly, the subsequent decades saw interest in gold collapse (some say it was clubbed) as happier faces (remember Yuppies?) replaced inflation-wracked malaise with 2d or 3rd choice Volcker given the greenlight to inflict short term pain for longer term gain. And it worked, until things started getting really happy in 1987 and then-new chairman Greenspan blinked on the October 1987 20% crash and instituted plunge protection in keeping with Wall Street’s best advice. The rest, as they say, is history, but for now I think we should remember that few thought then (1979-1981) that the political will could be mustered to deal with what seemed like intractable problems, yet they were, for a while at least, until new problems were sown, and old ones continued unaddressed or were made worse. Still wavering, not unlike the Dow/S&P these last 6 trading days, between thinking S&P is right and thinking Buffet is (at least about America, fuck yeah!).

Clamdigger's picture

Christopher Death Cross. That'd be a great metal band name.

caerus's picture

OMG i wish i had thought of that...

wandstrasse's picture

more suggestions for sinister TA phenomena:

Termination Coil

Hades Pattern

Lethal Grid

Doom Doji

Grave Candles

Irish66's picture

You timing is scary because I was just studying hidenburg omen.

Mr Lennon Hendrix's picture

I have been thinking about that a lot this week too.  The market keeps getting more strange every year.

caerus's picture

it's like a wrestling move... as in "uh-oh he's setting him up for a wicked death cross"

yipcarl's picture

good last paragraph.  AMEN TO THAT. 

cossack55's picture

August 2th?  Is that like "How do you know the toothbrush was invented in Kentucky?"

TradingJoe's picture

Up?Down Until Really DOWN then "really" UP :))) who cares made several killings this week and turned them all into...yes Physical PMs, price? who cares!

rubearish10's picture

Yeah and if you look at the euro, gbp and aud, you'll see that any uptrend has been quashed or at least within its flag and close to 50dma. So, watch for that big short covering USD rally to drive that death cross or vice versa.

LoneStarHog's picture

Tyler...typo...QE2 not QE3

John McCloy's picture

Anyone else from ZH going to the Ron Paul Meetup GOP debate tonight in Nolita Manhattan let me know.

baby_BLYTHE's picture

If I had "F*ck You" money like most of you do, I would be on the first plane over there now.

Say "hi" to the good doctor for me

vast-dom's picture

would have loved to join you, but not tonight. hope you enjoy!


BTW where in Nolita???

alien-IQ's picture

fuckin /ES flying on fumes for volume. I've been seeing 5 point moves up on less than 5000 contracts in a one minute span. ridiculous.

ZeroPower's picture

Thats exactly it. Book is extremely thin on either side thus allowing big fluctuations either way.

Bobby Lee's picture

Scroll that chart back to before you became enamored with simple-minded TA and tell us how many times that scary "death-cross" worked. It works when it works. It doesn't when it doesn't. That's TA in a nutshell.

alien-IQ's picture

what do you use, if not TA, a Ouija board?

Bobby Lee's picture

If it's published, or worse, widely accepted, it doesn't work. Your only hope of finding something that works is to invent it.

What_Me_Worry's picture

WTF did they find this dead cat!

Strider52's picture

Bernanks dumped Scruffles out the chopper window at 3 this morning.

Stochdoc's picture

Light volume until the last 15 minutes....Oh, wait.

monopoly's picture

john, let us on the West Coast know how you made out and your thoughts on the debate.

MFL8240's picture