I keep hearing about copper's potential "death cross" and the
negative impact the cross would have on the market.
Really? Does copper truly have the predictive power that Wall
Street analysts' are hyping? Or is the "death cross" in copper just
another useless indicator much like the
The so-called universally accepted theory suggests that if
copper prices are declining, then that means that demand is slow,
the economy will suffer, and stocks will plummet.
Before writing this article I didn't have the answers, but after
some diligent research I think I have a grasp as to how valuable
the "death cross" is in predicting the next intermediate-term move
for the market.
The Wall Street Journal recently reported a
possible "death cross" in copper futures
. Traders and analysts have been talking about the potential
ramifications ever since. According to the article, a death cross
would be a negative for copper and more importantly, the overall
***A "death cross" is a technical indicator that occurs when the
50-day moving average (50 DMA) crosses below the 200-day moving
average (200 DMA). In theory, the crossover indicates a bear market
is on the horizon. The chart below shows why technicians are
suggesting this could occur in the near future.
I decided to back-test the "death cross" theory. I went back to
1989 (as far as my charting software would allow) and calculated
the returns in the S&P 500 after each "death cross" signal in
copper and the subsequent push back up through the 200 DMA.
There were 15 occurrences over this time frame, and according to
the statistics the S&P 500 was positive 73 percent of the time
(11 out of 15 occurrences) from when the 50 DMA moved below the 200
DMA (the point of the death cross), to when it crossed back above
the 200 DMA. The table below shows the returns for each
The median return in the S&P 500 was 3.1 percent, with 73
percent of the occurrences ending with positive returns by the time
copper's 50 DMA crossed back above the 200 DMA.
In short, the death cross pattern is wrong, more often than
right, when used as an indicator of future performance for the
Following the signal would have kept you out of the sharp
decline in 2001 and 2008, but it also would have kept you out of
several large advances, including the 48.6 percent advance in
So the question remains, is the "death cross" in copper a good
predictive indicator as to where the market is headed over the
subsequent three months? I would argue - no.
Too often I see individual investors focus their energy on the
latest and greatest predictive indicator in the news to make
decisions on their long-term investment outlook.
As my esteemed colleague, Tyler Laundon stated in his article, "
Is a Correction Coming
" the reality is that there are all sorts of strategies that
work to make and
investment gains in small cap stocks. But it's the one that
investors stick to that will work over time. Based on my research,
I wouldn't stick to a strategy based on copper's death cross -
unless I was going to get long the S&P 500.
***Now is the opportune time to carefully analyze individual
small cap stocks in search of the best opportunities, regardless of
whether copper shows the death cross formation or not. A broad
market pullback is possible, but I wouldn't use copper's price
action as my 'tell' signal.
And if a pullback for small caps occurs you may find your
favorite investments trading at a discount, thus presenting a
buying opportunity. The trick, as always, is to have your watch
list ready and in hand and focus on the quality and valuation of
the individual small cap investment.