S&P 500 Triggers Death Cross

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tdp2664 InvestorPlace It’s official, on August 11, the S&P 500′s 50-day simple moving average sliced below the 200-day SMA. This condition is dramatically called the death cross. The death cross has foreshadowed some remarkable market meltdowns (-46% in 2000 and -55% in 2007) and shouldn’t be ignored. However, it also has one serious flaw. Just a few months ago the S&P was trading at 1,370. Those were golden times, but they’ve passed. Reality paid a visit and the S&P dropped as much as 267 points, or 19.48%. The S&P has recovered somewhat but still is 15% below the May high. If you’re holding on to long positions until you get the crossover sell signal (or death cross), the last few months have been a grueling experience. Why? Simply because your sell signal has been late to the party, 15% too late. The Serious Flaw Merely using the SMA crossover as buy/signal is like having to wait for an important document sent via snail mail when it could have just been sent via e-mail. Yet, that’s exactly what the financial media is doing–investment advice in the snail mail format. To illustrate what I mean, allow me to quote some headlines featured around May 2, 2011: “The S&P Breaks Out” “Sales growth the Big Surprise on Wall Street” “Why Berkshire and Buffett Never Lose” “World revs up U.S. Profits” “Geithner: No risk U.S. will lose AAA Credit Rating” Quite to the contrary, our May 1 update showed two revealing charts (the first chart is shown below) and commented: “The first two charts update the S&P’s position relative to various resistance levels and the ideal target range for a potentially historic market top. The first chart provides a big picture snapshot going back as far as 1997. As mentioned before, the ideal target range is between 1,369 and 1,382. 1,369 is a Fibonacci projection level going back to the 2002 market low. A move to 1,369 would be close enough to consider the right side of the giant M-pattern as completed.” Our July 28 update commented about support at the 200-day SMA: “A break below the 200-day SMA and the trend line may trigger panic selling. One way to avoid missing out on a potentially big opportunity is to use the 200-day SMA at 1,284 as delineation between bullish and bearish bets — buy as long as the 200-day SMA serves as support, sell if it becomes resistance.” The death cross (like Wall Street and the financial media) is like a seemingly concerned bystander offering you an umbrella after you’ve gotten drenched by the rain.