One of the common themes we have spotted it that many of the readily available tools don’t provide their users with any significant edge. If the indicator is easy to use and easy to master, that means a plethora of individuals will be relying on it to give them some advantage over the masses. What they fail to understand is that they are the part of the mass, they are trying to outwit. A lot of chatter has sprung about lately regarding the death cross. First, it was the Dow, and now there is talk about the U.S dollar. This tool just like the “Hindenburg Omen” is worthless. Other than the cool names they carry, they offer little regarding value: they are both easy to master and understand and this, in essence, renders them useless.
For those not familiar with the term death cross, it is a technical indicator, and it occurs when an index or stock’s 50-day moving average falls below its long-term moving average, which is usually the 200-day moving average. The talking heads would have you believe that the end of the world was nigh. As usual, when thi occurrs, the naysayers come out of the woodwork screaming bloody murder. Like a broken clock, they sometimes appear to be right for a brief moment, but then reality sets in, the illusion vanishes, and they run back into the woodwork when the markets reverse course. Take a look and determine what it represents to you, disaster or opportunity.
When we look at it, we do not see anything dangerous or anything to fear. Once fear takes over you are paralysed and rather than acting in a way that produces rewards, the result is usually failure and loss. Now to be fair, if you are nimble, then one could make money shorting the markets, but you would have to be pretty agile; something that is easier said than done. Look how fast the market reversed course. Using the Dow as an example, if one had shorted the Dow based on the so-called “death cross pattern”, the outcome would have in most cases been far from perfect. You would have jumped in based on the signal, but what would have been your signal to jump out. If you did not move quickly or were waiting for a trigger to nullify the “death cross”, you would have lost of the potential gains, and this is assuming that you managed to get in at the precise moment the signal was triggered.
We believe that time would be better spent by making a list of stocks to buy, for the upside gains usually dwarf those made from shorting. History is on your side too. Over time markets trend upwards, and not downwards.
At the Tactical Investor, a death cross is a buying event, time to break out a bottle of champagne and celebrate alone, while the masses are busy chanting death to the markets. Take the time to understand that disaster is the code name for opportunity, and that the masses are never on the right side of the markets for any given period. Be happy when the masses panic, and panic when the masses are happy.
Word to the Wise
Death cross sell signal is one of many useless market omens. They work sometimes but they fail more often. Your odds of success are far better if you flip a coin; at least you have a 50/50 chance of winning. The same cannot be said for those of who have followed this signal. In our opinion, the best place for this signal is the trash can. Follow this simple rule; buy when the masses panic and sell when they are Euphoric.
A hallucination is a fact, not an error; what is erroneous is a judgment based upon it.
Bertrand Russell
Originally published on the Tactical Investor
