SAN DIEGO (ETFguide.com) Believe it or not, despite a
rising market, there are a number of notable death crosses in
economically sensitive sectors/markets.
Death cross. It sounds dangerous, but is it something we should
worry about right now? What is a death cross? Which indexes are
marked by the death cross and what does it mean for the stock
A death cross occurs when the 50-day simple moving average (
) drops below the 200-day SMA and shows that the market is losing
momentum. It is never a bullish signal but is not always 'deadly'
A number of economically sensitive industry sectors and asset
classes just saw such a bearish crossover of the moving
Banks & Financials
Bank of America is trading at its lowest price since May 2009.
JP Morgan is trading at its lowest price since November 2011.
Citigroup is within striking distance of its 52-week low.
Goldman Sachs is the lowest it's been since April 2009.
Together those four companies account for 25% of the Financial
Select Sector SPDR (NYSEArca: XLF). It may not be a surprise to
some to find the financial sector marked by a death cross, although
it should be.
No sector benefitted more from QE2 than banks (NYSEArca: KBE)
and financials. Banks not only got to borrow money for next to
free, they also got more than a trillion dollars to invest in a
stock market that's more than doubled since the 2009 low.
If bank and financial stocks can't rally in this environment,
when can they? The market obviously knows something investors
don't. With or without the SMA crossover, the weakness of
financials is longer-term troublesome.
Rebound Related Commodities
There are a number of commodities that should be getting more
expensive in a rebounding economy. Out of all the commodities,
copper is the only one said to have a PhD in economics. As an
industrial metal, copper is used in everything from houses to tech
gadgets. It's therefore said that it has an ability to foretell the
future for stocks.
The 50-day copper SMA crossed below the 200-day SMA on June 23.
Ironically, this crossover has been more of a buy than a sell
signal, as prices have been rising and the SMA's are just about
ready to create a 'golden cross.' That's when the 50-day SMA moves
above the 200-day SMA.
Steel is a staple in the building industry. No big construction
project can be built without steel. Steel prices are somewhat
reflective of global construction activity. Steel prices saw a
death cross on June 20. The silver lining here is that the 20-day
SMA has crossed back above the 50-day SMA just a few days ago. This
is a mini golden cross.
The United States Oil Fund just saw a death cross; however the
50-day SMA for the actual oil price futures has yet to slice below
the 200-day SMA. Just a few months ago, the media spoon-fed us that
rising oil prices are a sign of the worldwide economic recovery. If
that logic is correct, what do falling or stagnant oil prices
The Shanghai Composite and the iShares FTSE China ETF (NYSEArca:
FXI) just saw a death cross. The richest country in the world has
seen stocks slide continuously since the 2007 top.
Emerging markets (NYSEArca: EEM) produced a death cross
yesterday and the broad MSCI EAFE Index (NYSEArca: EFA) is just a
few days away from the nearly inevitable.
What Does it Mean?
Obviously, SMA crossovers are a lagging indicator. In most cases
it takes several months of declining prices before a death cross
appears. By the time the 50-day SMA drops below the 200-day SMA, a
large portion of the (initial) decline may already be over (see
This doesn't mean that the death cross is unreliable as a
buy/sell signal. In fact, there've been nine crossovers
(death and golden crosses combined) for the S&P (NYSEArca: SPY)
since 2000. Six signals turned out to be accurate with an average
gain of 19.35%. Three signals were wrong and led to an average loss
of 10.15%. 66% accuracy with a 2:1 risk/reward ratio is not
There hasn't been a death cross in the S&P but based on the
indicators discussed above, now is not the time to embrace stocks
unconditionally. The VIX (Chicago Options: ^VIX) is within striking
distance of the 16 level. Every decline below 16 over the past
years has resulted in nasty sell offs.
If you wait for a death cross for the S&P before selling,
you may have to stomach a drop below 1,250 before getting a SMA
crossover sell signal. Who wants to lose 5 - 10% before getting a
On the other hand, who wants to lock in gains now and forfeit
future potential gains?
Best of both Worlds
Making trade or investment decisions solely based on SMA
crossovers is like communicating via snail mail if you could use
e-mail - any received message is delayed.
A more effective and pro-active approach is to identify
significant support or resistance levels. Since the market tends to
react to major resistance levels, it is prudent to sell against
resistance while buying against support. Support/resistance levels
are fractal and can be used by long-term investors as well as swing
or even day traders.
Using important Fibonacci levels and trend lines that stretch
over two decades, the ETF Profit Strategy Newsletter identified
trouble (resistance) ahead previously on April 3, 2011: 'In terms
of resistance levels, the 1,369 - 1,xxx (reserved for subscribers)
range is a strong candidate for a reversal of potentially historic
This was followed up by a May 1 recommendation to short the
S&P against the first Fibonacci resistance at 1,369.
What about support? On June 15, the ETF Profit Strategy
Newsletter stated that: 'The 200-day SMA at 1,257 is sandwiched
between the 1,255 Fibonacci projection level dating back to 2002
and this week's s1 at 1,259. Wednesday's low was at 1,261.9. If
this low is not enough, there is a strong cluster of support at
1,259 - 1,245. A drop into the 1,259 - 1,245 range would prompt us
to close out short positions and leg into long positions.'
Keep in mind that all this action happened within a period of
time that was void of any 50/200-day SMA crossovers.
Will the S&P (SNP: ^GSPC) and other major indexes like the
Dow Jones (DJI: ^DJI) and Nasdaq (Nasdaq: ^IXIC) challenge their
They may, but no death cross will ring a bell at the top and
none of the above mentioned death crosses may prevent a new
Resistance levels, on the other hand, have a much better track
record of identifying important resistance points and market
Profit Strategy Newsletter
uses complex technical analysis to identify important
support/resistance levels and accompanying trade recommendations.
The most recent update shows the likely target range for a
large-scale market top.