SPY: The death cross and what you need to know

What is the message of the market?

Primary Downtrend: Death Cross

The stock market is in a primary downtrend with all three major US averages experiencing a death cross (when the 50-day moving average crosses beneath the 200-day moving average) in recent months. While this does not guarantee that the powerful rally over the past week will fail, the bearish signal must be respected. In light of the well-established downtrend in the bond market and rapidly tightening liquidity conditions, the death crosses in the stock market take on added importance.

Technical Backdrop

Admittedly, there is nothing magical about using the 50-day and 200-day moving averages to determine the primary trend. The key concept at play is that we use a meaningfully long short-term average price and a sufficiently time-spaced, longer-term average price in order to identify trend changes while minimizing short-term noise.

In essence, the goal is to minimize random or frequent trend-change signals from moving average crossings that are too short in duration to be meaningful; while at the same time, producing trend-change signals that are not overly lagged. In other words, the signals need to be timely enough to be actionable but lagged enough to avoid false signals.