Death Crosses aren’t really all that scary
Key Takeaways
- SPX rally ahead of CPI report has reached 2/2 peaks. While this might be important short-term, it’s thought to be a temporary roadblock. Longs still recommended, with any dips being buying opportunities for upside follow-through into Feb 14-15
- Death Crosses aren’t too negative given historical data
- Encouraging follow-through higher by Discretionary, Healthcare, Industrials as the “broader” market continues to play catch-up and recover
SPX’s rally has neared 2/2 highs heading just ahead of some important economic data and likely the strongest CPI reading since 1982. (Estimates 7.2%) (Incredible that the FOMC still will be pumping 40 billion worth of Agency MBS for another month. Overall, trends remain bullish but the area at 4595 could be a temporary challenge to exceed after this recent runup. Overall, it’s right to stay long, expecting that pullbacks will be buyable for further upside in US Stock indices into 2/14-15, at/near 4640-50. the first important area of potential trend change for February. Bottom line, no change to the thesis and a bullish bias into mid-to-late March looks correct.
Does a Death Cross really matter?
Many investors have inquired as to how Death Crosses might affect the recent runup, as this looks to happen soon in indices like the NASDAQ Composite, and has already happened in the Value Line Geometric and Russell 2k index. A Death Cross happens when the 50-day moving average crosses below the 200-day moving average. Some investors claim that crossovers like this can be important. The NASDAQ’s daily chart is shown below with the 50-day moving average seen in yellow, while the 200-day moving average is shown in light blue.
Importantly, the prior occasions don’t seem all that meaningful and were actually a wrong time to pull money out of the market. Recall that in mid-April 2020 markets last experienced a Death Cross, roughly three weeks after the market bottomed out in March 2020. Prior occasions back in 2015-2016 look to have been a very choppy time for markets and rife with whipsaws. Thus, such an event didn’t prove all that problematic. NASDAQ chart shown below.
Historical studies aren’t all that negative for Death Crosses. My own look back in the past (thanks to “Tireless Ken” shows that periods following a Death Cross in NASDAQ Composite have been positive on many forward-looking timeframes. As this study since 1971 shows, the NASDAQ composite made a Death Cross 31 times. Forward returns on 3-month, 6-month and 12-month periods were all positive. SPX studies do show a negative bias on a 7-day study when going back since 1945 but given the positive slope of the Stock market over time, it seems best to not give these crossovers all that much importance.
Finally, it seems important to mention that many sectors, like Consumer Discretionary, Industrials, Materials and Healthcare, have all begun constructive bounces that have helped their near-term technical structure in the short run. The Philadelphia Semiconductor Index (SOX) managed to make a daily close back over 2/2/22 peaks, while this also happened in the Industrials and Materials sector.
Furthermore, Discretionary (shown below) has successfully recouped an area of consolidation that was broken into late January. Thus, this snapback move back into this consolidation is considered a positive and a false breakout for this group. Charts below highlight the Invesco Consumer Discretionary ETF (RCD) which has made a very bullish bounce in recent days.
Being back over prior “neckline” support that was broken is encouraging, and suggests this group can make further positive follow-through into the month of March, even if not in a straight line. Bottom line, many sectors are showing bullish snapbacks, and given the low level of correlation right now between SPX stocks (Has fallen to 0.2 in recent days) this creates an excellent environment for “stock-pickers” which was so unkind to those that attempted to beat the SPX last year. Much of this was due to High growth Technology outperformance which has faltered thus far in 2022. While this recent bounce in many of the cyclicals looks to continue, this remains a short—term rally only, and difficult to extrapolate into a push back to new highs.
