The “death cross” is a term from technical analysis used to describe when the 50 day moving average crosses beneath the 200 day moving average. The 50 day EMA (red) now appears to be in the process of crossing beneath the 200 day EMA (pink), as highlighted by the ellipsis.
S&P 500 DAILY 15 JULY – 10 AUGUST 2011 CHART COURTESY ANYOPTION.COM 03 aug 10 2343
There are a few kinds of moving averages – simple(NYSE:SMA), weighted(WMA), and exponential. The exponential moving average, the EMA, is one of the more sensitive to recent price, and thus one of the first to do this.
Note that the death cross does not always spell disaster. As the chart below shows, the last one came in late June 23 2010 (highlighted by the circle on the left) in the wake of panic following the First Annual Greek Bailout. The decline that followed was neither deep nor long lasting. The 50 day EMA crossed back over the 200 day EMA in mid September (rightmost circle)
S&P 500 DAILY CHART 25 MAY – 9 NOVEMBER 2010 02aug 10 2341
However, as shown in the chart below, the prior death cross, that of early January 2008 (ellipsis in the upper right corner) sounded the death knell of the rally that began in the summer of 2002 and the start of the current Great Financial Crisis, at least as far the this index, as good a barometer for overall risk appetite as any, is concerned. Note the damage in the chart below.
S&P 500 DAILY CHART 23DECEMBER 2007 – 13 DECEMBER 2009 04aug 11 0004
Note in particular:
- The index fell from ~1490 to ~682, a 54% drop at its worst level in early March 2009.
- The death cross did not repair until mid July2009
- The index, and risk assets in general, have not recovered since then and remain in a long term bear market. The index peaked this past May, and now appears on track to begin the next leg lower, as shown using the monthly S&P 500 chart below for clearer long term perspective.
S&P 500 MONTHLY CHART DECEMBER 1, 2005 – AUGUST 10 2011 05aug 11 00 16The Big Question
So the big question: is this death cross more likely to be the mild one of June 2010 or the disastrous one of January 2008? Sadly, the latter appears more likely the case, here’s why.
The June 2010 saw a quick recovery aided by
- A Greek rescue package that partially succeeded in deferring the crisis for about a year
- The advent of QE2 in late summer-early fall of 2010, which provided the fuel for the rally that ended this past May.
Neither condition applies today.
After the apparent failure of QE 2 to have any lasting positive effects (and leave the US with another 600+ billion of deficit spending) and recent debt ceiling fight, whatever additional stimulus measures may yet be coming, if any, are unlikely to be as large or as influential, even for a short time.
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