The chart below is making the rounds in the twitter finance world, and it’s freaking out the uninformed.
The chart shows two instances when one moving average crossed another moving average (50-week and 100-week) to the downside and coincidently the market went down big. The underlying assumption is that the death cross we are experiencing now will have the same effect. This is a great chart to get a lot of page views and to meet the daily blog quotas, but it means nothing at all. Two sample sizes are not enough to conclude anything. Secondly, you would have to believe that the 2001 and 2008 plunge was because of a cross of two moving averages and not because of the Internet craze and the housing bubble. Thirdly, if you went back to 1950 and calculated what happen every time this “death cross” has happened you will quickly see that there is no statistical edge to the downside at all.
The fact that the “death cross” is just nonsense to put it in a nice way, it doesn’t mean that the market can’t collapse, or crash, or go down, etc. The point is that you the reader now more than ever has to cut out a lot of noise that now fills blogs, business websites, etc., posts are now being written to fill pages and meet quotas.