Scary-sounding descriptions of the market's state never cease to surface during periods of uncertainty. The latest term I've heard is the "ultimate death cross." This chart formation, used by Societe Generale strategist Albert Edwards, occurs when a 50-month moving average falls below a 200-month moving average. According to news reports about the market pessimist's recent research note, this ominous-sounding indicator is close to appearing on the long-term S&P 500 chart and is a warning of a major bear market.
Among the major global indexes, it is apparently rare to see this indicator. Edwards said that the S&P 500 came close to forming an utimate death cross in 1978. The indicator did appear on charts of the Nikkei in 1988. Edwards points out that the Japanese market has been in the "embrace of the bear" ever since.
A regular (as opposed to ultimate) death cross formed on S&P 500 charts last year. On August 18, 2011, I wrote about how the 50-day moving average crossed below the 200-day moving average earlier that week. Since I wrote about the indicator, the S&P 500 has risen by more than 20%.
The indicator's failure to predict a bear market is not surprising. Last year, Mark Hulbert looked at 20 years' worth of data on the death cross. He found the indicator to have no statistical significance. In other words, despite its ominous name, the death cross is all bark and no bite.
Presently, a short-term bullish formation is appearing (as shown below). Since bottoming in early June, the S&P 500 has been experiencing a series of higher lows and higher highs. The index has also risen above its 50-day moving average. Though the chart pattern suggests more volatility could occur, it does point to rising stock prices.(click to enlarge)
Keep in mind that a trend only exists until it doesn't. This is why it is important to consider a variety of indicators before making a market call.
(We have a primer on moving averages for those of you unfamiliar with them or who want to learn more about them.)
Negative Yields in Europe
Speaking of charts, I want to call your attention to a set of charts published by the Financial Times on Tuesday. Yields on two-year notes turned negative in six European countries: Switzerland, Austria, Denmark, The Netherlands, Germany and Finland. This means investors will get back less money in two years than they paid for the notes earlier this week.
Why buy an investment that is priced to lose money? Investors would rather risk taking a known, small loss than incurring an unknown, but potentially far larger loss by purchasing short-term debt issued by other European countries. Plus, if fears about the European sovereign debt crisis intensify, it is possible that yields on the notes issued by the six aforementioned countries could fall even further, thereby creating a short-term profit for this week's buyers.
Charles Rotblut, CFA is a Vice President with the American Association of Individual Investors and editor of the AAII Journal.