Tag Archives: time

Beware The Death Cross?

Summary A most ominous event came to pass this week. For the first time in four years, we witnessed a “death cross” in the broader U.S. stock market. It’s worthwhile to consider the death cross in historical context to determine its significance if any to investors today. A most ominous event came to pass this week. For the first time in four years, we witnessed a “death cross” in the broader U.S. stock market. The mere name alone may cause investors to think that they should be taking action. After all, if we are reading about a death cross in the business news headlines, it certainly can’t be a good thing, right? While a death cross is widely considered a bearish signal that stocks are about to break lower, this is not necessarily the case when examining these episodes from a historical perspective. This does not mean that it should be completely ignored, but at a minimum it must be taken in context. Dissecting The “Death Cross” So what exactly is the death cross? It takes place when the average closing price of the U.S. stock market over the last 50 days (a shorter term trend reading) falls below the average closing price over the last 200 days (a longer term trend reading). To many investors, the fact that the shorter-term trend in the 50-day moving average has crossed below the longer term trend in the 200-day moving average is a signal that the overall market trend may be reversing to head much lower. As a result, some investors are inclined to use the death cross as a signal that it may be time to start exiting stock positions to protect against portfolio losses. Before going any further, it’s important to make a key distinction about the recent death cross that we have been hearing about. It took place on the Dow Jones Industrial Average (NYSEARCA: DIA ). And while I appreciate the historical significance and its well-known status among the broader general public, the Dow is not a U.S. stock market index to which I pay much attention. This is due to the fact that it’s an index that’s not only limited in its number of holdings at just 30 stocks, but it also is a price weighted index instead of being market cap or equal weighted. As a result, price movements in Goldman Sachs (NYSE: GS ) trading at $200 per share has a disproportionately larger impact on the Dow on any given day than General Electric (NYSE: GE ) or Cisco (NASDAQ: CSCO ) that are trading in the $20s despite the fact that both are meaningfully larger in terms of market cap. Instead, I prefer to monitor the S&P 500 Index (NYSEARCA: SPY ), which consists of a much broader universe of 500 stocks and is market cap weighted, along with a variety of other indices. And to date, the S&P 500 Index is still trading with a 50-day moving average that’s still nearly 1% above its 200-day moving average. In other words, while we have witnessed a death cross on the Dow, it has yet to take place on the broader S&P 500. This is not to say that we won’t see a death cross in the S&P 500 Index soon, but it should be noted that we have not yet seen one to date. Moreover, the uptrend in U.S. stocks remains very much intact despite the extended period of sideways trading that has taken place since late 2014. (click to enlarge) But given the fact that the S&P 500 is as close to a death cross as it has been in years, it’s still worthwhile to consider the implications of such an event. To begin with, the death cross is a fairly uncommon occurrence for the U.S. stock market. Over the last 85 years, stocks as measured by the S&P 500 Index have experienced a Death Cross on 44 separate occasions. The last such instance took place in 2011, which is shown in the chart below. (click to enlarge) The death cross is a fairly rare experience. But do they matter? Not nearly as much as the name might suggest. First, it’s important to note that a fair amount of stock market downside has typically been absorbed by the time the death cross takes place. Historically, this supposedly bearish crossover has historically occurred 74 trading days on average following a market peak for an average decline of -10.66%. In short, investors are already down double-digits on average before the death cross alarms have been triggered. With that being said, it’s worth noting that today’s market is setting up a bit differently. Through Friday, August 14, we are now 59 trading days removed from our most recent market S&P 500 peak on May 20 (although it should be noted that we came extremely close to a new high just 18 trading days ago on July 20). And if a death cross were to take place today, it would only have stocks down less than -3% from their peaks. As a result, it could be argued that such a signal this time around might provide some protection against more meaningful downside that might follow this time around. Exploring this point in more detail, stocks have continued lower for another 77 days on average after a Death Cross before bottoming with an average decline of -12.21%. As a result, if average historical precedence held, taking action might protect an investor from absorbing a mid to high single digit portfolio decline on average. But the risk may outweigh the reward by undertaking such an approach for the stock market has shown the propensity on a meaningful number of instances to be at or near a bottom by the time a death cross has taken place. For example, in eight of the 44 past Death Crosses in the last 87 years, the stock market has bottomed immediately on the day that this bearish crossover has taken place. In other words, an investor using the death cross as an exit signal would have them selling at the exact bottom of the market 18% of the time. And a one in five chance of bottom ticking a stock market pullback is a risk that investors should take into consideration. Taking this a step further, the potential for bottom picking on a death cross signal becomes measurably worse when incrementally expanding the time horizon. For in another 12 of the 44 past death crosses, or another 27% of the time, the stock market bottomed within 10 trading days after the bearish crossover occurred. And four more, or an additional 9% of the time, stocks bottomed within 25 trading days, or roughly a month, after the death cross took place. Putting this all together, at 24 out of 44 instances, or 55% of the time, the death cross is more likely to signal that a short-term bottom is imminent for investors than that a long-term correction is underway. As a result, despite its ominous sounding name, investors should not be quick to react upon hearing that a death cross has taken place. What About The Other 45% Of The Time? None of this means, however, that the death cross should be completely ignored. For it does provide some useful leading signals that investors should consider in protecting against any future market correction or outright bear market. First, while the actual crossover of the 50-day moving average below the 200-day moving average comes too late to be useful from a trading perspective in many instances, the spread between the 50-day and 200-day moving average can serve as a useful leading indicator about the continuing strength of the stock market going forward. Over time, a spread between the 50-day and 200-day moving average between 5% and 10% is considered strong. But what we have seen since the market peak in early 2013 is that the strength of the U.S. stock market has been gradually but steadily fading in the two plus years since. What this suggests is that the third longest bull market in history is increasingly running out of gas. Could it reverse to the upside? Absolutely, but we have seen nothing to suggest a revival in stock market strength in this regard for more than two years running. (click to enlarge) Another consideration is the average amount of time between death crosses. While as suggested above that most such crossovers have often been better predictors of short-term market bottoms than long-term market reversals, nine out of 44 past instances, or 20% of the time, have been followed by extended market corrections if not full blown bear markets. And each of these nine instances has taken place following what have been far longer than normal periods of time between death crosses. For example, when U.S. stocks have gone more than 500 trading days between death crosses, the probability that it’s followed by an outright bear market including a decline greater than -20% increases to roughly half. And given the fact that we are now at 1,007 trading days and counting since the last death cross in 2011, we are operating today with risk levels considerably elevated in this regard. Bottom Line While the death cross is an ominous sounding event that we are likely to hear more about if the market continues to grind, it’s not nearly the bearish indicator that the name suggests. More often than not, it serves as a signal that a short-term bottom in stocks may be imminent. But with that being said, it’s still useful for long-term investors that are viewing the information in the right context. And while a death cross in stocks should not be viewed in isolation as anything that requires urgent portfolio action, it does hold more meaningful significance in the current environment when considered in the context of the market environment that we are operating in today. Disclosure : This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

HSBC, Custodian Of GLD’s Gold, Is Closing 7 London Vaults

Summary HSBC, custodian for the SPDR Gold Trust’s gold, is closing its 7 gold vaults. SPDR Gold Trust investors should be aware that their gold might be on the move and that they are not necessarily protected if it is lost or stolen en route. Traders might consider shares in the iShares Gold Trust for the time being as an alternative without this added risk. Longer-term investors in gold are encouraged to invest in funds that specify the location of their gold and who’s in charge of guarding it. My readers might recall a couple of articles I wrote in 2013, in which I suggested that gold investors consider alternatives to the SPDR Gold Trust (NYSEARCA: GLD ), namely the Central Gold-Trust (NYSEMKT: GTU ) or the Sprott Physical Gold Trust (NYSEARCA: PHYS ). There were (and still are) several reasons why long-term gold investors should choose these funds over the SPDR Gold Trust (although I conceded that the SPDR Gold Trust was a better trading vehicle, given its liquidity and superior gold price tracking), but one that stood out in particular was custodianship. The SPDR Gold Trust has HSBC (NYSE: HSBC ) as its custodian, but HSBC doesn’t specify where it keeps its gold. Furthermore, HSBC doesn’t have to retain its custodian status of the fund’s gold. If it chooses to – and SPDR Gold Trust shareholders have no say in this – HSBC can call on sub-custodians to hold the fund’s gold. The only stipulation is that HSBC deems that the institution is suitable as a custodian of the fund’s gold although the stipulation in the prospectus is extremely vague. Furthermore, HSBC is not responsible in the event that a sub-custodian loses the fund’s gold so long as it can prove in court that it was acting in the best interest of the fund’s shareholders. I never stipulated that there was any sort of fraud, but it seemed that the language was broad enough so that it wasn’t impossible. Considering that there are other funds that offer exposure to gold, and considering that these funds’ prospectuses are very clear regarding the custodianship of their respective gold hoards, it seemed fairly straightforward to go ahead with one of these two other funds. What’s Happened Since? Just recently, there has been a development in this situation that has prompted me to issue a cautionary note to shareholders of the SPDR Gold Trust. HSBC is closing each of its 7 London gold vaults. Now, there is no evidence that SPDR Gold Trust gold is found in any of these vaults, because HSBC doesn’t have to disclose the location of the fund’s gold. After all, HSBC is a massive international banking conglomerate with other gold vaults, including in, say, New York. Furthermore, we don’t even know whether HSBC is acting as the trust’s custodian, because, as we’ve seen, it can hire a sub-custodian to do the work. But if we look at the simple facts, it is clear that the trust’s counterparty risk will rise as a result of this, and the trust’s shareholders need to at least consider them should they choose to continue to hold on to the shares. If the trust’s gold is held in one or more of these London vaults, then when they close in a couple of months, the gold will inevitably have to be moved. Whether it is to a sub-custodian’s vault or to another HSBC vault, there is added counterparty risk in the fact that this gold will have to be shipped. This means it will come into contact with numerous people, and it might even be shipped over water where a ship could sink or a plane could crash, thereby leading to a loss of the gold. Again, let me remind investors that HSBC is not responsible for losses so long as it can prove that its actions are in the best interest of trust holders in court. This means that if HSBC puts some gold on a plane and it crashes into the ocean, then this gold is gone and the shareholders will suffer, not HSBC. What Investors Should Do Announcements such as this should remind investors to study very carefully what it is exactly that they own when they own an ETF, especially one that is supposed to own a physical commodity such as gold. This gold will sometimes need to be handled and shipped, and this means risk to the fund’s shareholders. So in the past, I have suggested investors look at the other gold funds although short-term traders would be fine in the SPDR Gold Trust. Given the upcoming vault closures and the added counterparty risk – as minute as it might be – I think gold traders would be wise to suspend trading activities in the SPDR Gold Trust. There are alternatives. The iShares Gold Trust (NYSEARCA: IAU ) will not be impacted by this. This is an $11.25/share issue that trades several million shares per day, meaning that there should be plenty of liquidity for most traders reading this article. Options are less liquid for this fund relative to the SPDR Gold Trust, so that could be an issue. I also think investors would be wise to at least consider the less liquid Central Gold-Trust as a trading vehicle, which keeps its gold in Canada and which currently trades at an incredible 7.8% discount to its NAV. This is a $40/share issue that trades nearly 50,000 shares daily, so there is nearly $2 million in daily volume. Most retail investors should have no liquidity issues, and the fund is therefore an acceptable trading vehicle for the time being unless you are looking for very short-term intraday trades. The Bottom Line Maybe I’m being a bit paranoid in my warning, but I really do think there is a risk here. While it is probably a remote one and while it is impossible to quantify, those who trade the SPDR Gold Trust should have it in mind and watch out for more news on this front over the next few months. Finally, I want to reiterate that I think knowing where your gold is and who is in charge of protecting it is important, and for this reason, I think the Central Gold-Trust and the Sprott Physical Gold Trust both offer investors with better, safer opportunities. This statement is especially true when we consider that part of the justification for holding gold in your portfolio is that it is a safe asset that comes with limited counterparty risk. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

When The Dollar Crashes

Editor’s note: Originally published on January 26, 2015 Back in late April of 2011, legendary investor Jim Rogers made one brilliant call combined with one incredibly stupid observation. So he was hitting about 50%. That’s not bad, the very best prognosticators rarely do better than getting it right 65% of the time. Most people get it dead wrong most of the time. Speaking of silver on April 20, 2011, Rogers was quoted as saying, “If silver continues to go up like it has been over the past 2 or 3 weeks, yes, then it would get to triple digits this year. And then we’ll have to worry. It’s not parabolic yet”. Rogers concluded silver wasn’t yet in a bubble. That may well turn out to be one of the very worst predictions Jim Rogers ever made in his life. A week later, on April 28, silver peaked at just a smidgen under $50. In two weeks, by May 12th, silver dropped by an incredible 33%. But Rogers got one thing dead right when on April 20th, he said, “A parabolic move and all parabolic moves end badly.” Silver went parabolic and Rogers couldn’t look at a chart and recognize a parabolic move when it stared him in the face. He knew enough to understand the effect of a parabolic move; he just didn’t see it in front of him. If you want to retire rich, go to a tattoo parlor and have them inscribe on your forehead, in reverse writing, “ALL PARABOLIC MOVES END BADLY.” In the same way that people tend to think in absolutes about politics, either you are a Republican or a Democrat; investors want to think in terms of either Technical Analysis or fundamentals. That tends to suggest there are no other alternatives in either politics or investing. I don’t know a single investor made rich by either TA or fundamentals. Maybe they work for some, some of the time. I’ve just never seen it. In April of 2011 silver went parabolic. At least to those who were capable of recognizing a parabolic chart in front of them. There were probably 100 fundamental reasons to buy silver. TA suggested silver was headed to the moon. Both were wrong. There are 100 reasons to buy a commodity, any commodity, at every top. And if you actually believe TA is valid, invert the chart and see what is suggests then. That’s what Warren Buffett did before rejecting TA as an investment guide. The investment psychology as measured by the bullish consensus toward silver in April of 2011 was higher than it was at the very top of silver at $50.25 in late January of 1980. And silver went parabolic. ALL PARABOLIC MOVES END BADLY. I was working on a piece for Friday, last week, and I needed to know what the Dollar Index was doing. I pulled up a chart and saw that the Dollar Index was up a remarkable 2% for the day . It actually went above 2% during the day but I couldn’t capture it on a screen print. I did capture the 2% move and used it in a piece. 2% in a day is a lot in any currency much less the Dollar Index. For one reason or another, I watched again on Friday to see what the Dollar Index would do. Between Thursday and the high on Friday the 23rd of January the Dollar Index climbed a remarkable 3.25% in 36 hours. I’ve never seen such a move in a currency. No one that I know saw that or at least no one remarked on the move. So I went back to the piece I wrote about silver on April 25th of 2011 and looked at the chart I had posted of silver where I claimed, “Silver is going parabolic.” I took a lot of flak at the time in 2011 because all the silver clowns were convinced silver was going to $500 an ounce overnight. I was right, they were wrong. Silver went parabolic and then crashed in two weeks by 33%. About five guys got it dead right in April of 2011 and everyone hated them for it. A 3.25% move in any currency is a parabolic move. It is the kind of move that ends a trend, no matter up or down. There are a hundred fundamental reasons to buy the dollar right now. TA suggests the Dollar Index is going to 125. Everyone loves the dollar. The bullish consensus on the Dollar Index is the highest in recorded history. That is what marks tops. ALL PARABOLIC MOVES END BADLY. Black Swan events are those hard to predict and rare events that are beyond the realm of normal expectations. Parabolic moves may not qualify as in the realm of normal expectation but that doesn’t mean you can’t recognize them in front of your nose. The dollar index will crash one day. It won’t be down 33% in two weeks similar to that move in 2011 in silver. But the Dollar Index could be down 1/3 of the move since July of 2014 in as little as two weeks. The index was around 80 on July 1st and rocketed higher to 95 last week. I can see the dollar dropping 5 points in two weeks. Wouldn’t everyone be shocked?