What is the ‘death cross” and why should we care? I’m not quite sure, but the media is fascinated by them … in particular the ‘death cross’ just completed on the Russell 2000, small cap index.
A death cross is technical/stock-charting parlance for the point where an index (or stock price) sees its 50-day moving average price cross below its longer-term 200-day moving average price.
Technicians view this as a significant loss of momentum for the security or index in question…a harbinger of bad things to come. As we approached the ‘cross’ on the Russell 2000 yesterday, MarketWatch presented two articles on the topic: one, “Small caps may be in trouble…” positing the bull market may be over for a significant portion of the market (i.e. small caps), and the other, more balanced, “Time to worry? Russell 2000 ‘death cross’ looms.” In “Time to worry?…”a technical analyst/blogger, Ryan Detrick mentions that there have been 19 Russell 2000 “death crosses’ since 1988.
“He notes that an investor who shorted the index after the last death cross in 2011 would have been down 19% by the time it had reversed, while someone who shorted all 19 signals would have lost an average of 5.55% and made money only four times. The bottom line, Detrick says, is that while the death cross could mark the start of a big downtrend, it’s not a “clear-cut bearish signal.”
The CNBC crew gets it right for a change
CNBC “Fast Money” contributor, Josh Brown, CEO, Ridholtz Wealth Management, did a number on the facts about death crosses in the video segment,“Decoding the death cross.” Brown is a CNBC minion that gets it right. Non-the-less, within 30 minutes of this piece, there was another CNBC minion pointing out the dangerous omen that the ‘death cross’ held for the market … all of this beyond my comprehension.
How about yours?
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Another great post. There are a whole lot of people in this world who have learned enough about statistics to understand what statistical correlation is, but don’t understand that correlation does not necessarily imply causation.