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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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Thu, 08/11/2011 - 14:47 | 1551643 BeerGoggles
BeerGoggles's picture

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

Thu, 08/11/2011 - 14:57 | 1551675 Tyler Durden
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.

Thu, 08/11/2011 - 15:08 | 1551696 BeerGoggles
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.

Thu, 08/11/2011 - 15:13 | 1551719 dwdollar
dwdollar's picture

Your name says it all.

Thu, 08/11/2011 - 15:15 | 1551726 Rick64
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.

Thu, 08/11/2011 - 15:32 | 1551757 UGrev
UGrev's picture

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

Thu, 08/11/2011 - 15:52 | 1551796 BeerGoggles
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.

Thu, 08/11/2011 - 15:54 | 1551807 UGrev
UGrev's picture

were you on vacation for the past few days?

Thu, 08/11/2011 - 16:02 | 1551832 TruthInSunshine
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.

Thu, 08/11/2011 - 16:13 | 1551890 UGrev
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..

Thu, 08/11/2011 - 16:15 | 1551903 BeerGoggles
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.

Thu, 08/11/2011 - 16:30 | 1551991 Rick64
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.

Thu, 08/11/2011 - 16:58 | 1552089 malek
malek's picture

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

Thu, 08/11/2011 - 15:55 | 1551810 JW n FL
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!

Thu, 08/11/2011 - 16:03 | 1551836 SheepDog-One
SheepDog-One's picture

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

Thu, 08/11/2011 - 15:23 | 1551738 TruthInSunshine
TruthInSunshine's picture

Awesome secular bull market...

....for 14 years now, beergoggles!

 BTFD, bro.

 

 

 

Thu, 08/11/2011 - 15:03 | 1551699 bania
bania's picture

nominal values, schnominal values

Thu, 08/11/2011 - 16:04 | 1551813 Oh regional Indian
Oh regional Indian's picture

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

http://aadivaahan.wordpress.com/2011/07/08/july-15th-aug-15th-month-long-window-coming-up-initial-thoughts/

 

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

Game on from August 15th. 

Au-Gusts...  ;-)

ORI

http://aadivaahan.wordpress.com/2011/08/04/many-drafts/

 

 

 

Thu, 08/11/2011 - 16:48 | 1552059 johngaltfla
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....

http://youtu.be/_psHS1z7dPI

Thu, 08/11/2011 - 14:48 | 1551648 caerus
caerus's picture

death cross - best name ever

Thu, 08/11/2011 - 14:55 | 1551669 OpenEyes
OpenEyes's picture

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

Thu, 08/11/2011 - 14:57 | 1551677 caerus
caerus's picture

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

Thu, 08/11/2011 - 15:19 | 1551734 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

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

Thu, 08/11/2011 - 17:35 | 1552233 citta vritti
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!).

Thu, 08/11/2011 - 15:28 | 1551749 Clamdigger
Clamdigger's picture

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

Thu, 08/11/2011 - 16:02 | 1551834 caerus
caerus's picture

OMG i wish i had thought of that...

Thu, 08/11/2011 - 16:33 | 1551844 wandstrasse
wandstrasse's picture

more suggestions for sinister TA phenomena:

Termination Coil

Hades Pattern

Lethal Grid

Doom Doji

Grave Candles

Thu, 08/11/2011 - 14:49 | 1551653 Irish66
Irish66's picture

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

Thu, 08/11/2011 - 15:20 | 1551737 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

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

Thu, 08/11/2011 - 14:50 | 1551657 caerus
caerus's picture

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

Thu, 08/11/2011 - 14:51 | 1551660 yipcarl
yipcarl's picture

good last paragraph.  AMEN TO THAT. 

Thu, 08/11/2011 - 14:53 | 1551663 cossack55
cossack55's picture

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

Thu, 08/11/2011 - 14:59 | 1551687 Spastica Rex
Spastica Rex's picture

Right before August 3rb.

Thu, 08/11/2011 - 14:54 | 1551667 TradingJoe
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!

Thu, 08/11/2011 - 14:57 | 1551674 rubearish10
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.

Thu, 08/11/2011 - 14:58 | 1551680 LoneStarHog
LoneStarHog's picture

Tyler...typo...QE2 not QE3

Thu, 08/11/2011 - 14:59 | 1551683 John McCloy
John McCloy's picture

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

Thu, 08/11/2011 - 15:17 | 1551731 baby_BLYTHE
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

Thu, 08/11/2011 - 16:15 | 1551907 vast-dom
vast-dom's picture

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

 

BTW where in Nolita???

Thu, 08/11/2011 - 17:10 | 1552136 John McCloy
John McCloy's picture

Kenmare and Broome

Thu, 08/11/2011 - 15:01 | 1551693 alien-IQ
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.

Fri, 08/12/2011 - 12:50 | 1554588 ZeroPower
ZeroPower's picture

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

Thu, 08/11/2011 - 15:08 | 1551703 Bobby Lee
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.

Thu, 08/11/2011 - 15:15 | 1551724 alien-IQ
alien-IQ's picture

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

Thu, 08/11/2011 - 15:25 | 1551744 Bobby Lee
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.

Thu, 08/11/2011 - 15:10 | 1551709 What_Me_Worry
What_Me_Worry's picture

WTF did they find this dead cat!

Thu, 08/11/2011 - 16:00 | 1551830 Strider52
Strider52's picture

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

Thu, 08/11/2011 - 16:26 | 1551969 Stochdoc
Stochdoc's picture

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

Thu, 08/11/2011 - 15:11 | 1551711 monopoly
monopoly's picture

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

Thu, 08/11/2011 - 15:14 | 1551723 MFL8240
MFL8240's picture

1932 REVISITED

Thu, 08/11/2011 - 15:16 | 1551728 B-rock
B-rock's picture

According to a thinkorswim ES daily chart, the Death Cross has already happened. 

Thu, 08/11/2011 - 15:58 | 1551822 slewie the pi-rat
slewie the pi-rat's picture

thx for the link!

Thu, 08/11/2011 - 15:42 | 1551758 TruthInSunshine
TruthInSunshine's picture

BAC and C are two high quality names I wanna'' get with.

 

/sarc/

 

The Barney Frank Shart Cross just printed. FYI.

Thu, 08/11/2011 - 16:07 | 1551854 PhattyBuoy
PhattyBuoy's picture

lol ... really bad visual ... I am still laughing.

Blown O-ring Bounce.

Thu, 08/11/2011 - 15:54 | 1551801 Slap That Taco
Slap That Taco's picture

I've posted about this earlier today, but here goes: I trust the death cross much more at market tops then at times like now, although I WILL be shorting if it occurs because I'm a degenerate gambler who sometimes wins. But really, I'd prefer the market recover, fart around at 1380 or so, dip a bit to 1300 or so, languish at 1275 for awhile THEN have a 50/200 cross. BTW, without spell-check, I'm doomed.

 

Thu, 08/11/2011 - 16:18 | 1551922 slewie the pi-rat
slewie the pi-rat's picture

i think this is why we have urban legends about powerful bankster trading robotz "painting" the charts, slappy happy flappy

fuking degenerate gambler, yeah! 

if you look back to the last one, you woulda sold @ the exact LOW for a bit over a year, now

ah! QEII!  those were the daze!

2010 redux later this month? QEIII?

two weeks away...hmmm...i'm trying to recall what was happening two weeks ago...let me see, now...oh yeah!  the debt limit "crisis"!  then, a week later, the "downgrade" and then the rent was due, too, on the 5th there, as i recall, too...and many in the senior apartments were just sooooo thankful those goobermint retirement checks went out on the 3rd, and...they got their food stamps, too,...and civilization did not have its head ripped off with granny ready to shit down its neck, there, either, and...let me see, now,...

how was that where you live, slappy?

stay tooned, BiCheZ!

 

Thu, 08/11/2011 - 20:56 | 1552747 Slap That Taco
Slap That Taco's picture

HEY!

  Yup, if you used the SMA 50/200 last Summer you would have sold at the bottom. I use the EMA 50/20 which crossed only briefly, then uncrossed resulting in a BULLISH signal.

  Y'see, there's the Death Cross but there is also the Golden cross. You can't just follow them blindly, don't get too greedy, know when to get out.  I'm surprised at this article, I've had good luck with the 50/200 EMA crosses and the fake-outs have not been horrible.

 

 

Thu, 08/11/2011 - 15:58 | 1551824 Joshua Falken
Joshua Falken's picture

Mark Harvey should know that the Death Cross only happens when boith Simple Moving Averages are declining at the same time, therefore the Death Cross named for July 2010 was not real as the 200 day moving average was still moving up when the 50 moving average crosed below.

My target for the S&P 500 is 600 by March next year coming from a September retest of 1,200 based on the support line from the low in 2002 and the low in 2009.  This equates to a 25% reduction in S&P 500 earning and a PE of 10. 

 

Thu, 08/11/2011 - 16:05 | 1551843 Slap That Taco
Slap That Taco's picture

Good observation-BTW, I find the 50/200 EMA's to be a better indicator. 

600? Hmmm.. I thought I was the only one. 

Thu, 08/11/2011 - 16:37 | 1552003 slewie the pi-rat
slewie the pi-rat's picture

channelling heeeere's johnny:  i did not know that, joshua.

is the 200dma sloping down here?  it looks like it...

is this OT?  BRITAIN BURNS <i>(While the British government spends tens of millions of pounds per week bombing Libyan children, the British youth takes to the streets)</i>

pretty interesting "social commentary" on the state of british "politics" recently, spending all those hundreds upon hundreds of millions protecting innocents, abroad....hmmm...

by Timothy Bancroft-Hinchey, which writer, in my slewiest of humble freaking opinions, is absolutely ready for prime-time @ fight club!  see whatcha think but it's 2 pages, so, be warned!

-The opinions expressed by opinion writers on this website do not necessarily coincide with those held by the editorial of tripolipost.com

after all, they don't want to get bombed back to the stone age like the folks @ the tripoli TV station!

...just for taking the freedom to print an editorial from pravda's online english editior...L0L!!!

Thu, 08/11/2011 - 16:03 | 1551837 M.B. Drapier
M.B. Drapier's picture

Typo alert:

forced Bernanke to launch QE3 two weeks later

Thu, 08/11/2011 - 18:20 | 1552352 topshelfstuff
topshelfstuff's picture

Many here on ZH have been in Gold. A look at the past 10 years, from 2001 to now shows the S&P500 down a bit, Gold plus about 600%

http://finance.yahoo.com/q/bc?s=CEF&t=my&l=on&z=l&q=l&c=^GSPC

 

Fri, 08/12/2011 - 05:53 | 1553559 falak pema
falak pema's picture

Is the CEF (canadian fund) totally indexed on paper gold? physical gold? 

Thu, 08/11/2011 - 21:49 | 1552909 Number 156
Number 156's picture

One thing to remember,

This isnt a normal market. Under normal market conditions, indicators such as these play out as expected, but now we have many different things going on, the rule bending, algo quote stuffing and churning, government intervention never before seen, etc, etc..

I believe indicators dont work well  under those circumstances. However the fact that they dont work, I believe, is the more ominous tell that something is about to fully and completely implode.

This is not your Mom and Pop's market.

Do NOT follow this link or you will be banned from the site!