Here’s How to Breathe Life Into the Death Cross and Not Lose Money

Don’t confine yourself to a single trend point

Leonardo da Vinci

An early iteration of the death cross.

Source: Royal Collection via Bloomberg

I’m death on the death cross.

Joseph Ciolli, Bloomberg News, writes up the latest reincarnation of death, here. Jonathan Krinsky, chart champ at MKM Holdings, weighs in: “If you don’t make any upside progress, the moving average will start to flatten and eventually turn down. There are fewer and fewer stocks holding up the market, and that’s generally not a good thing.” Douglas Kass, senior vice president for Yankee Baseball at Seabreeze Partners, suggests it is “almost comical that traders and investors view an event like a moving average break as consequential and, as a definitive forward and leading indicator of future stock prices.”

Focus on “will start to” and “a definitive forward and leading.”

Simplistic work explains how the death cross sucks the lifeblood out of investing, which is figuring out how not to lose money.

Here is the death cross as it appeared on Tuesday. It happened when the 50-day moving average of the Dow Jones industrial average dipped below the 200-day moving average—the yellow circle below:

The DJIA: No one cares. Pros roll over laughing at the fixation on these two deadly lines crossing.
The DJIA: No one cares. Pros roll over laughing at the fixation on these two deadly lines crossing.

By definition, as Krinsky nails it above, moving averages paint the past. They’re a shifted and summed and smoothed snapshot of the past. Taken alone, per Kass’s comments, they are useless.

Two ex-post averages, as above, describe a simplistic rate-of-change (as the 50-unit crosses the 200-unit) but describe only one-point in space. How can anyone make a trend judgment off a single point?

Better yet, someone e-mail the track record of relying on “the death cross.” And while we’re at it, where is the “when” of it? When and how do you actually act using such simple time functions?

We now present the Kleinman Life Cross (Euclidean Warning! Lines and Circles Alert!):

The DJIA: Pros care. Not guaranteed to make money, but rather helpful in assisting in losing less money. Brainpower is required.
The DJIA: Pros care. Not guaranteed to make money, but rather helpful in assisting in losing less money. Brainpower is required.

The textbook moving averages according to George Kleinman—who owns the moving average space—are 2-day, 9-day and 30-day. After some back-testing, I have interpolated 2-, 9-, and 30-day over to 12-, 50-, and 200-day to equate to The Death Cross. Here’s how to bring life to your moving average studies. Start with three, not one or even two, averages. In a downtrend, the 12-day average cuts below the red 50-day average: the orange circle. The 12-day blue average, then, crosses the 200-day series: the purple circle. The 50-day average finally cuts in deathlike fashion through the 200-day average: the yellow circle.

So what. Why is the Kleinman Life Cross better than the Death Cross?

With money at risk, whatever your beliefs are, a three-series study gives you a set of three decision points, as compared with one with the Death Cross. With the Kleinman Life Cross, you can fold in other studies to inform the choice of stay-long, go-to-cash, and/or go-short. Critically, the Kleinman approach takes the underlying series and brings to life the first and second derivatives of change. After you enjoy making and losing money with them, you begin to see the spaces between the moving averages (the blue, red, and green lines shown above). This works even better with a logarithmic y-axis, but it is log-free Wednesday.

So what would I do if I were long the Dow Jones industrial average on May 19? My “belief” is different than your belief. I would: a) wake up on June 8; b) go-to-cash on June 15; or c) go-short on Aug. 4.

The Death Cross occurred on Aug. 11.

Discuss.

(Below, incidentally, is the bible when it comes to Kleinman.)

Observe the Life Cross of Chapters 9 and 10.
Observe the Life Cross of Chapters 9 and 10.
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