Sign in
Become a MarketWatch member today
Mark Hulbert
July 9, 2010, 12:01 a.m. EDT · Recommend (5) · Post:
View all Mark Hulbert "º
"¹ Previous Column
Outlook for euro and dollar has changed
First Take "º
NTP faces uphill battle against rich foes
By Mark Hulbert, MarketWatch
ANNANDALE, Va. (MarketWatch) -- It certainly sounds ominous -- even to an investing public already primed by a heavy dose of melodramatic pronouncements in recent weeks.
It's called the death cross, and it happened recently in the stock market.
For those of you who haven't been paying attention to your technical analysis charts, the death cross occurs when the market's 50-day moving average drops below its 200-day moving average. For the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 10,158, +19.42, +0.19%) , this occurred in late June, and for the S&P 500 index /quotes/comstock/21z!i1:in\x (SPX 1,074, +3.75, +0.35%) , just this past week.
Is the death cross indeed the kiss of death for the stock market?
You be the judge.
I fed into my PC's statistical package the Dow's daily values back to the late 1800s, when it was created. It turns out that, over the intervening 114 years, there have been 85 death crosses -- an average of one every 16 months or so.
I then measured the Dow's average gain following these death crosses over the subsequent month, quarter, six months, and year. The data appear in the table below.
The market does tend to turn in below-average performances following death crosses; indeed, the differences in the table are significant at the 95% level that statisticians often use to determine if a pattern is genuine.
If I ended my analysis at this point, the data would point strongly in favor of interpreting the stock market's recent death cross as another strike against an already beleaguered market.
But, as Paul Harvey used to say, there's the rest of the story.
It turns out that the death cross has had a mediocre track record at best over the last two decades. To be sure, it's had some great recent successes -- such as the one that occurred in December 2007, very early in the 2007-2009 bear market. But there have been a number of other failures -- such as one that occurred in October 2005, in the middle of the 2002-2007 bull market.
Overall, in fact, there has been no statistically significant difference since 1990 between the average performance following death crosses and all other market sessions.
Blake LeBaron, a finance professor at Brandeis University who has extensively analyzed various technical analysis strategies including moving averages, says that what's happened since 1990 raises the distinct possibility that something has permanently changed in the financial markets that largely eliminated moving averages' potential as a market timing indicator.
Supporting this possibility, according to Prof. LeBaron, is that moving average systems stopped being profitable in the foreign-exchange markets at about the same time they lost their effectiveness in timing the U.S. equity market. This increases the likelihood that whatever caused moving average systems to become less profitable in the stock market was more than just a fluke.
What might that something be? Prof. LeBaron speculates that moving averages might have been sabotaged by too many investors trying to follow then.
Ownership of personal computers skyrocketed in the late 1980s and early 1990s, and coupled with cheap online databases, those PCs enabled a much larger group of investors than ever before to discover and quickly exploit the moving average. A dramatic lowering in transaction costs at about the same time made it much easier for investors to trade on signals generated by moving averages.
The bottom line? The weight you put on the stock market's recent death cross depends on whether you think the last two decades are a mere exception to the long-term rule -- or if, instead, you believe that something indeed has permanently changed.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now.
NTP Inc., a patent holding company without a website, a product, or a listed phone number, is clearly hoping that history repeats itself as it takes on some of the biggest names in the technology universe, writes Therese Poletti.
1:31 p.m. Today1:31 p.m. July 9, 2010 | Comments: 1
- mali786j | 3:29 a.m. Today3:29 a.m. July 9, 2010
"Mark Hulbert: Track record of the death cross http://on.mktw.net/9OEMi8" 11:32 p.m. EDT, July 8, 2010 from MktwHulbert
"Mark Hulbert: Outlook for euro and dollar has changed http://on.mktw.net/dyS9Si" 11:41 p.m. EDT, July 6, 2010 from MktwHulbert
"Mark Hulbert: Contrarian indicator offers bearish picture http://on.mktw.net/9i4fXe" 11:06 p.m. EDT, July 5, 2010 from MktwHulbert
"Mark Hulbert: Contrarian reaction to gold's big plunge http://on.mktw.net/ceDhjC" 11:03 p.m. EDT, July 1, 2010 from MktwHulbert
"Mark Hulbert: The market is on the edge of overvalued http://on.mktw.net/b81Z6M" 11:35 p.m. EDT, June 30, 2010 from MktwHulbert
On Retirement
Caring for ailing parents from afar
Media Web
Rachel Maddow: MSNBC voice of reason
The Big Picture
Tempest in data teapot misses larger issue
Ethics Monitor
Lawmakers need to get off the sidelines
Read Full Article »