The Death Cross


By Al Thomas

Whenever the market has a serious break there is always an “expert”, usually more than one, who proclaims it is a bear market.

It has only been very recently that a decline of 20% has been pretty much accepted as being a bear. To those who own stocks it certainly feels like one.

Our recent break of 20% has been proclaimed by some as a bear, but the bear only lasted a few minutes before it took off to the upside for more than 300 DOW points from the low of the day. And for several days thereafter new daily highs were made.

Is this a bear or not?

What the investor needs to know is the long term trend. No market goes straight down – or up. If the trader looks only at the daily closing price it looks more like a stair step in one direction or the other.

The experienced trader knows there are many methods of determining market direction. Those who look at “valuations” find this does not work. The direction of a stock is 60% influenced by the overall market direction and 20% by the movement of the sector. That means valuation only has a 20% influence.

Another thing is the time horizon for the trader. Is he a long term or short term trader? Floor traders like I was for 17 years only look out a few days at the most. The Buy N Holders are not found there

For the investor who has a 401K or similar long term strategy he needs to know a timing method that will show when to buy and when to be in cash.

Any fool can buy. It is the smart investor that knows when to sell. Bear markets are usually 3 times faster going down than bull markets going up. Being out of the market in cash is a position. No broker will ever say that.

A slow but reliable method for exiting stock market positions is called the DEATH CROSS. When that signal is shown it means the market is headed lower. There will be times when using this strategy the client will lose money, but over the long run it has an excellent profit record. He will always be out during 30, 40, 50% declines.

It is very simple. Any investor may implement it. It is not subjective. The signal is “buy” or “sell”. Anyone can see it.

On the computer the investor displays 2 moving averages: 200-day and 50-day. Plot these against any major index such as the S&P500 or the Dow Jones Industrial Average or Sector.

During a bull market the 50 line is above the 200 line. When the 50MA line turns down and penetrates the 200MA line that is the time to exit all positions. That is the Death Cross. So simple even a cave man can do it.

Don’t let your portfolio be buried under the Death Cross.

Al Thomas’ new book, “If It Doesn’t Go Up, Don’t Buy It!”, 3rd edition, has helped thousands of people make money and keep their profits with his simple 2-step method. The method made 10% during 2008. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know. Copyright 2010 Williamsburg Investment Co. All rights reserved.