The death cross isn’t stocks’ Grim Reaper, according to Fisher Investments UK

Here at Fisher Investments UK, we think that looking at the death cross has major flaws as a technical indicator and a poor history of predicting the future. A death cross occurs when a short-term downtrend (stocks’ 50-day moving average) falls below the longer 200-day moving average. According to the theory, when a death cross occurs stocks will lose momentum and struggle — or worse. Proponents point to global stocks’ death crosses in December 2000 and September 2007 — both near market peaks.

Trouble is, there are more false reads than positive. According to the data we see here at Fisher Investments UK, global stocks flashed death crosses in 2004, 2006, 2011, 2015, 2016, 2017 and 2018 — all global bull market years. While death crosses can occur in bear markets — huge, fundamentally driven downturns — they also strike during short-term corrections and other blips. They don’t render further declines automatic.

The death cross looks backward, but past trends aren’t predictive. This is hard for many to fathom. If something falls in nature, logic says it will keep falling unless something stops it. But here at Fisher Investments UK, we think that applying this notion of momentum to stocks is wrongheaded. Laws of physics don’t apply to equities.

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Stocks aren’t serially correlated — what just happened doesn’t affect what happens next. This isn’t to say historical charts themselves aren’t useful. They can be great. Often, a chart is a wonderful way to depict a complicated trend, describe recent economic or market conditions or otherwise add perspective. But Fisher Investments UK believes that using depictions of past returns to colour your market outlook is a dangerous practice.

Instead, you can use other rules to evaluate whether it is a correction or bear. Like our three-month rule: don’t take defensive action until three months after a peak has passed. This gives you time to assess whether a bear is actually there and helps save you from being fooled by a correction.

We like to follow the 2 per cent rule here at Fisher Investments UK, which we believe can help you spot the difference. Bear markets decline about 2 per cent monthly from peak to trough and start slowly. Even if you stay invested through the earlier stages of a Bear, the 2/3 – 1/3 rule gives you time to get out later. Roughly two-thirds of a bear’s losses come in the final third of its life. In contrast, because corrections are sentiment-driven — swings of emotion — we don’t believe anyone can reliably time one. Hence, we think the best course of action is to stay disciplined and ride it out.

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Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: 2nd Floor, 6-10 Whitfield Street, London, W1T 2RE, United Kingdom.

Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in equity markets involves the risk of loss and there is no guarantee that all or any invested capital will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world equity markets and international currency exchange rates.

This document constitutes the general views of Fisher Investments UK and Fisher Investments, and should not be regarded as personalised investment or tax advice or as a representation of their performance or that of their clients. No assurances are made that they will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts may be, as accurate as any contained herein.