Yesterday’s market swoon delivered a bearish omen of epic proportions. The Dow Jones Industrial Average formed a relatively rare technical signal known as the death cross.

And nothing gets the chattering class all aflutter like some spooky sounding indicator going off. It’s a guaranteed eyeball grabber for the media. And yes, my first sentence was most definitely sarcasm. The only “bearish omen of epic proportions” I can think of these days is Donald Trump in the White House.

I kid.

I’ve received a question or two regarding the death cross so let’s hash it out. First, the definition:

A death cross occurs when the 50-day moving average falls below the 200-day moving average. It’s supposed to be bearish. In case you’re curious the signal does have a bullish counterpart. It’s known as the golden cross and occurs when the 50-day moving average rises above the 200-day moving average.

But that’s a tale for another time.

Remember, moving averages are smoothing mechanisms designed to strip out the often confusing day-to-day volatility and provide a simple picture of how the average price level of a stock has changed over time. The 50-day moving average reflects the intermediate-term trend while the 200-day moving average reflects the long-term trend.

Quick interjection – my fingers are tired of typing “moving average” so I shall henceforth abbreviate with “MA”, capiche?

Because the 50 MA contains only 50 data points it moves quicker than the 200 MA which, you guessed it, contains 200 data points. When prices start to fall the 50 MA drops quicker than the 200 MA. If the prices fall far enough it eventually drags the 50 MA below the 200 MA thereby creating the <cue spooky music> oh-so-scary death cross.

So what to make of it?

I would argue a death cross really doesn’t tell you anything you didn’t already know. I mean, for heaven’s sakes man, was it not obvious before yesterday that the highly revered, yet mostly useless, Dow Jones Index was in a downtrend?

Yes.

So what’s changed?

Not a whole lotta, enchilada.  If the day before the death cross I was sitting at a 5 on my make believe 1-10 scale of bearishness, should I now up it to 6 or 7? Just because the 50 MA finally breached the 200 MA?  Just because the blue line went from a little above the green line to a little below?

C’mon. Sounds a little too arbitrary to me.

It’s like saying, “hey, I’m not that bearish because we’re only down 5%, but, boy, if the market drops 6% I’m buying puts like a banshee.”

You simply can’t make drastic adjustments to your trading/investment posture due to ONE signal. I’m a bigger proponent of incremental change.

If you want to be a bit more bearish today because the bears now have one more feather in their cap then have at it. But don’t think that just because the 50 MA is now a touch below the 200 MA the current market correction is destined to turn into a raging bear market.

And if it does, it’s most certainly not because of the death cross.

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