Are the markets about to encounter the"Death Cross"?
- 1 July 2010
- From the section Business
At the end of each month, BBC World News business presenter Jamie Robertson looks at the world's major stock markets. This month he encounters the theory of the Death Cross - and what threat it really poses to investors.
"You mean…" said the Investor warily "...it's not a double dip?"
"If only it was," replied the Chartist with an ironic smile.
"Then what, in heaven's name, is it?" The Investor's voice trembled as he spoke.
"I fear," replied the Chartist, his fingers tensing over the ancient runes etched into his iPad, "we are looking at nothing less," he hesitated, "than The Death Cross."
Cue music: dum-dum-dum-dum---duuuuuum.
Well, let's face it, it is all a little Gothic.
So here's a slightly more technical explanation: plot on a daily basis the average price of an index over the previous fifty days. Then do the same for its 200 day moving average. When the 50 day line falls and crosses the 200 day line then you have a death cross (cue music etc..).
If the 50 day crosses upwards then you get the opposite - a golden cross. A death cross is, yes, you've guessed it, a bad thing; a golden cross is a good thing.
The reason why there is a lot of chatter about all this is that recently they've been springing up like mushrooms all over the place.
Back in December 2007, the FTSE had one and we all know where we went after that.
The Nikkei and the FTSE both established one last week. The Bloomberg European 500 has just had one and the Dow and the S&P 500 are perilously close to establishing their own in the next few days.
Worryingly for the mining companies, the price of copper also established one last month.
Now before we throw up our hands in despair and head for the hills, the death cross historically does not always presage disaster: the Dow experienced a death cross in mid 2004 and again in mid 2005, and chugged along fairly happily notwithstanding.
But, let's just say it has a habit of indicating fairly major changes in direction.
Steve Pope, Global Equity Strategist at Cantor Fitzgerald followed the path of the Bloomberg global equity index.
"The fifty day moving average," he said, "went back up through the 200 at the end of 2004 and that heralded a massive rally of 79.28% through to October 2007, and then it crossed back down in February 2008.
"It made a half-hearted attempt to cross back up in June and then gave up the ghost and fell 55% until 9th March 2009," says Mr Pope.
That index established a death cross on June 8th.
If you think we might be straying into the region of utter mumbo-jumbo you wouldn't be alone, although these crosses do seem to give an oblique guidance as to the psychology of the market.
After a period of steady growth, steady decline or just stability, investors get restless/cautious/frightened/bored and look for a change.
Hence you get a short term inclination swerving across a long-term trend - and breaking it.
Steve Pope explains the change in attitude over the last month: "The positive sentiment had run ahead of itself and there was a need to change risk profiles. So people are taking money off the table."
'Wall of money'
The question is, whether this change in direction catches investors' collective imagination and fulfils the worst auspices of the death cross, turning it into a collapse.
Despite all the negative talk Steve Pope says there is much talk of a "wall of money" waiting to come into the market.
There is little here in the way of reliable hard numbers but he has heard US analysts talking of S&P500 companies holding anything between $1.2 - 1.8 trillion in cash, on short term deposit, available for the appropriate moment to invest.
Not yet though.
Even though the summer is going to be hard for equities, he believes the late third and fourth quarters could show sharp gains for corporates - not necessarily linked to strong macro-economic growth.
"Even if these come from costs savings, well so what? It's still profit." says Mr Pope.
Isn't there a limit to how much a company can cut?
"Well, cost-cutting isn't just cutting jobs. It's a moving target. You're always improving processes, finding new materials, new machinery to do things better.
Companies are in a better condition now than ever before for profits to feed straight through to the bottom line, and that should lead to markets moving back up."
So, that's all right then.
Cue more music... "diddle-di-di-dum", (Radiant executives; investors gambolling on sunlit uplands, etc etc).