I’m a sucker for market lore–those weird little myths and superstitions that surround traders and the financial markets. They remind me of the years I spent coaching youth baseball, another human activity shrouded in wisps of myth. In any case, a recent CNBC story line caught my attention that said, “Beware the Death Cross”. The article didn’t offer anything more than an analyst saying that he was worried because the 50 day moving average had turned and looked like it might cross down through the rising 200 MA, thus forming the bearish “Death Cross.” I’ve heard the whispers about the “Death Cross” for years, so I decided to go back and see if there was anything to it besides a wildly romantic label. Unfortunately, it does appear that significant things happen when the 50 DSMA crosses the 200 DSMA, in either direction.

Let’s take a look at the monthly chart of the SPY. For the averages I used a 2 and 9 month EMA to simulate the 50 and 200 day averages (there’s about 22 trading days per month). On the left, the upward crossing in late 1996 marked the beginning of a huge rally. In late 1998, the averages tried and failed a crossing, and the rally resumed. The first true down crossing occurred in the summer of 2000, and the market just collapsed for 3 years. Finally, in early 2003, an upward crossing led to a 5-year rally that featured a steady upward grind where the averages bumped each other, but never crossed. Again, in late 2007, the averages crossed down, marking the sharp Bear market, which ended in spring of 2009. Now that the market has several daily closes below the 200 SMA, the 50-day average is heading down toward the 200, and the two should meet sometime this month.

Now, one could argue that moving averages are lagging indicators, and their crossings are statistically meaningless. However, legend has it that billions of dollars of institutional money key off this simple moving average cross trading system, and traders should pay attention. Me? I come from French Catholic stock, and we’re like the Irish, or any baseball player, when it comes to legends, myths and fantasies. Count me Bearish if the Death Cross happens.