www.marketwatch.com/story/track-record-of-the-death-cross-2010-07-09
It's called the death cross, and it happened recently in the stock market. For those of you who haven't been paying attention to your technical analysis charts, the death cross occurs when the market's 50-day moving average drops below its 200-day moving average.
Is the death cross indeed the kiss of death for the stock market? I fed into my PC's statistical package the Dow's daily values back to the late 1800s, when it was created. It turns out that, over the intervening 114 years, there have been 85 death crosses -- an average of one every 16 months or so. I then measured the Dow's average gain following these death crosses over the subsequent month, quarter, six months, and year. 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. Blake LeBaron, a finance professor at Brandeis University who has extensively analyzed various technical analysis strategies including moving averages, says that what's happened since 1990 raises the distinct possibility that something has permanently changed in the financial markets that largely eliminated moving averages' potential as a market timing indicator. LeBaron, is that moving average systems stopped being profitable in the foreign-exchange markets at about the same time they lost their effectiveness in timing the US equity market. This increases the likelihood that whatever caused moving average systems to become less profitable in the stock market was more than just a fluke. 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 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. Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Mark Hulbert Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now.
Halliburton is a tough act to follow It's been nearly three months since BP's blowout scared the tar out of the oil field services sector. Halliburton calmed some of those fears Monday, and raised others, writes Jim Jelter.
When the majority of traders, including the Fed, GS and other government sponsored organizations, use technicals to trade by, whats the point? In a way, if everyone trades by technical indicators, then it becomes its own follow the herd mentality and no longer a contrarian method. Way to many trade by technicals which becomes its own Death Cross."
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