Before and after

  • A not-so-deadly cross
  • For your enjoyment
  • Defying death
  • One more
  • Gold stock rebound
  • Achieving the ‘impossible’

From the Washington Post’s Richard Cohen, before the 2016 US election result, 22 August 2016:

It is a serious business to question the legitimacy of elections. What happens at the polls is at the very heart of our political system. It is not, I grant you, a perfect system, but we know how to do elections and, when they are over, we abide by the results. Many Americans believed that Al Gore beat George W. Bush, but they — not to mention Gore himself — accepted the outcome.

From the Washington Post’s Richard Cohen, after the 2016 US election result, 10 January 2017:

Donald Trump is a one-man basket of deplorables. He is a braggart and a liar. He is a bully and a demagogue. He is an ignoramus and a deadbeat, a chiseller and either a sincere racist or an insincere one, and his love for himself is matched only by my loathing of him. He is about to be president of the United States. A constitutional coup may be in the offing…

One remote remedy is impeachment by the House and conviction by the Senate.

What was that about ‘when [elections] are over, we abide by the results’?

It seems like Mr Cohen could do with a good lie down. Oh, we do enjoy the hypocrisy of the mainstream press…

Markets

Overnight, the Dow Jones Industrial Average closed down 31.85 points, to 0.16%.

The S&P 500 closed with no change from the previous day.

In Europe, the Euro Stoxx 50 index fell 2.76 points, or 0.08%. Meanwhile, the FTSE 100 added 0.52%, and Germany’s DAX index gained 0.17%.

In Asian markets, Japan’s Nikkei 225 is up 67.74 points, or 0.35%. China’s CSI 300 index is down 0.52%.

In Australia, the S&P/ASX 200 is up 11.8 points, or 0.2%.

On the commodities markets, West Texas Intermediate crude oil is US$50.96 per barrel. Brent crude is US$53.75 per barrel.

Gold is trading for US$1,187.28 (AU$1,609.69) per troy ounce. Silver is US$16.80 (AU$22.77) per troy ounce.

The Aussie dollar is 73.75 US cents.

A not-so-deadly cross

Your editor isn’t much of an expert when it comes to technical analysis.

Scratch that. We’re nothing of an expert. Our knowledge of and interest in technical analysis barely hovers above zero.

That’s why we leave that stuff to the experts.

We’re not entirely sure why technical analysis bores us so much. Sitting next to a grumpy but endearing old stockbroker for two years (may he rest in peace) in the mid-2000s may have something to do with it.

He would derisively refer to technical analysis charts as ‘pictures’.

Whatever the reason, charts bore us. That is, unless there is an interesting or intriguing story behind the chart.

Our relatively new-found fascination with Dow Theory and its chart pattern is an example. As is the glee with which we look at the chart of estimated US company earnings, where analysts insist earnings will rise 20% over the next year.

Hogwash.

And so, the chart that grabs our attention today is another with a story behind it. It’s a chart which, according to Bloomberg, ‘stands on the cusp of entering a bearish trading pattern known as the death cross’.

Terrifying!

The chart in question is of the MSCI Emerging Markets index. You can see it below:



chart image

Source: Bloomberg
Click to enlarge


It’s hard to see, but on the extreme right of the image, the 50-day moving average (pink line) is close to crossing below the 200-day moving average (yellow line).

So, just how terrifying is this ‘death cross’ setup?

Over the past five years, the ‘death cross’ has triggered five times.

On the first occasion, however, the MSCI Emerging Markets index had preceded the ‘death cross’ by falling around 13%. Not a good start. In fact, by the time the ‘death cross’ actually eventuated, the index had already started to rebound.

On the next occasion, in mid-2013, the ‘death cross’ was of some use. It arrived too late for the first part of the sell-off, but once it appeared, the index fell another 11%.

Good job.

For the third occasion, in early 2014, by the time the ‘death cross’ appeared, the MSCI Emerging Markets index had already fallen 11% during the preceding five months.

Religiously following the ‘death cross’ this time would have been a monumental disaster for a trader. From the time it triggered until the moving averages switched places, the index gained nearly 8%.

Oh dear.

As for the next instance, in late 2014, the market fell 10%…before the ‘death cross’ triggered. It then immediately rebounded, no doubt shaking out short-sellers, before falling 8% from there.

Finally, the ‘death cross’ triggered again in mid-2015. But not before the index had already fallen 12%. Fortunately, for ‘death cross’ fans, the index dropped another 18% within weeks…and a total of 27% over the next three months.

At last. A win for the ‘death cross’.

Although, it’s not really much of a win. In terms of predictability and the ability to trade off the ‘death cross’ for profit, in this case at least, it would seem the toss of a coin may (or may not) produce a better result.

The markets often produce very scary signs for investors. The trick, we believe, is to sort the relevant from the irrelevant.

Based on this, at least, the ‘death cross’ appears to have more bark than bite.

For your enjoyment

For your enjoyment, below is the annotated version of the chart, showing the relevant percentage returns:



chart image

Source: Bloomberg
Click to enlarge


It’s of no real value, except to show the proof of the analysis.

Defying death

Maybe it’s just the Emerging Markets index where the ‘death cross’s’ record is a little patchy. How about the US S&P 500 index? See the chart below:



chart image

Source: Bloomberg
Click to enlarge


The ‘death cross’ has only triggered five times over the past nine years on the S&P 500.

And unfortunately, its record here is no better. Arguably, it’s worse. Of those five times when the ‘death cross’ has triggered, the market almost always recovered from that point to a new high.

The one exception is the instance on the far left, which was near the beginning of the downturn in 2007.

And for the Aussie market, an improvement. But still hardly better than a coin flip:



chart image

Source: Bloomberg
Click to enlarge


Far from triggering a collapse in stock prices in 2012, the ‘death cross’ triggered one of the Aussie market’s biggest rallies in years.

The following instance in 2014 resulted in a short term dip, before a rally to a post-crash high. And the final (so far) instance in mid-2015, did precede a big drop in the Aussie market.

So all up, we could say that, where the Aussie market is concerned, it has a one out of three record.

By anyone’s measure, that’s not particularly good.

We’re all in favour of warning signs of a stock market crash. It’s just that, we’re afraid to say, this isn’t one of them.

One more

We think we’ve shown you enough charts for one day, but one more won’t hurt. It’s our ‘Dow Theory’ chart.



chart image

Source: Bloomberg
Click to enlarge


The Dow Jones Industrial Average is the white line. The Dow Jones Transportation Average is the orange line.

The Industrial index is near a record high. The Transportation index isn’t. That means the Transportation index hasn’t ‘confirmed’ the bull market.

US companies are due to begin reporting earnings in two weeks. What will they tell us about the health and state of the US economy? We can hardly wait.

Gold stock rebound

One final visit to the ‘death cross’. This may or may not be significant.

In August, the US VanEck Vectors Gold Miners ETF [NYSE:GDX] hit a multi-year high in August last year. The ‘death cross’ triggered in November, after the stock had already fallen 32%.

Since then, it has rebounded from the December low. Could this herald the beginning of another gold stock rebound?

Perhaps. If it is, there are a bunch stocks you should think about buying now. Details here.

Achieving the ‘impossible’

Last week I found out something about one of our premium trading services.

At first, I didn’t believe it. It went against everything everyone tells you about trading.

But I checked it…and then double-checked it.

The claim was right. It seems that one of our trading services is achieving the impossible. We’ll have more to say about it in the weeks ahead — including who it is and what they’re achieving.

In short, it’s stunning. And like my reaction at first, I’m not sure you’ll believe it. But it’s true. And we’ll show you just how, soon.

Stay tuned.

Cheers,
Kris