In July 2012 Albert Edwards, the closely followed investment strategist at Société Générale, warned that the S&P 500 was “on the verge of an ultimate death cross,” foretelling imminent major losses for the stock market, with the S&P 500 possibly seeing its index halved to 666 points. The ultimate death cross occurs when the 50-month moving average of the S&P moves below the 200-month moving average, or put another way, when the difference between these moving averages – the spread – becomes less than zero.
In this Jul-2012 article I reasoned that an ultimate death cross could not occur, predicting that the spread would form a trough before the end of 2012, and that this event would be a macro signal for a new bull market.
In a follow up early Nov-2012 article I showed that the spread’s lowest level would be 8, expected to occur at the end of Nov-2012, and that from then onwards the level would increase at least until Aug-2013, irrespective of the movement of the S&P 500.
It is now one year after the spread made a trough, so let’s see what really happened:
In Figure 1 below is the most recent plot of the S&P 500 and the spread to Nov-8- 2013.
- One can see that none of Edwards’ prediction came true; the ultimate death cross did not occur, the market did not collapse, but the S&P 500 is at the time of writing at an all-time high.
- The lowest level of the spread was 8.0 from Nov-16 to Nov-23-2012.
- From then onwards the spread continued to increase and on Nov-8-2013 reached a value of 116.7. (Red portion of spread graph.)
- The S&P500 gained about 30% since the spread made a trough. (Red portion of S&P graph.)
In the table below are the occurrences of all the previous trough formations of the spread since 1897 and the subsequent performance of the stock market. A trough formation close to zero is a rare event, having occurred only on five previous occasions, not counting the one of Nov-2012.
The previous trough occurred 35 years ago and heralded the bull market which only ended in 2000. Historically, troughs of the spread close to zero always provided a positive outlook for the market. It would appear from the performance of the market since last November’s trough that a repeat of history may be in the making. So far the market has “only” gained 30%, and this would appear to be on the low side when compared to previous gains after troughs.
The conclusion of my July 2012 article stands. The signal “….. provided a positive forecast for the stock market. It was never a harbinger of doom, but actually was a bearer of good tidings.