- While the benchmark ETF has printed the “death cross,” this should not cloud your decision-making process one way or the other.
- Certain phenomena are neither guaranteed to follow their stated implications or move in the contrarian direction.
- Especially under current ambiguous circumstances, it’s best to stay grounded in the fundamentals.
If you peruse the world wide web for information regarding the benchmark exchange-traded fund SPDR S&P 500 ETF Trust (NYSEARCA:SPY), you’ll eventually come across the phenomenon known as the “death cross.” This is a condition where a publicly-traded asset’s 50-day moving average (MA) slips below its 200-day MA. Mathematically for SPY stock, it signifies that bearish activity has become the dominant trend. But should investors react to this phenomenon?
More often than not, the answer is no. And under the present circumstances, the answer is a heck no.
Of course, many will argue against the point above. Whenever the 50-day MA (or any nearer-term price average) dips below the 200-day MA (or any longer-term price average), it indicates that on balance, the broader sentiment has become risk averse. Thus, when you’re dealing with a benchmark asset like SPY stock, this dynamic should serve as a warning to not press one’s luck.
On the other hand, historical evidence indicates that the death cross could be a contrarian indicator. That is, in many cases, the pinging of the death cross indicated that the market hit a bottom or close to it. Therefore, it’s time to be greedy when others are fearful. Using that logic, people should be prepared to open their wallets for SPY stock.
But then, this all raises a question: should you be a conformist or a contrarian? Well, I present to you why you should be neither.
|SPY||SPDR S&P 500 ETF Trust||$416.38|
SPY Stock and the Joe Biden Effect
Let’s face it: President Joe Biden is unpopular. In fact, the President’s net approval rating is “underwater” in 40 states. Presumably, that wouldn’t happen if Americans approved of the job he was doing.
Naturally, given the divisive nature of the political realm heading into the 2020 election, Biden’s lack of resonance with the American public sparked some concerns about electoral integrity. Fueling this notion was the premise that no presidential candidate won Ohio and Florida and yet failed to win the election.
Well, it turned out that John F. Kennedy also failed to win Ohio and Florida, but managed to become president anyways. But even if the Ohio-Florida metric was a legitimate thing, it would be the political equivalent of the stock market’s death cross phenomenon. The pinging of this sign may point to certain relevant undercurrents but by no means should you base all your decisions on unusual statistical phenomena.
In other words, the flashing of the death cross doesn’t guarantee that the equities sector will tumble. Instead, it’s a nudge to consider conducting more research. Analogously, Biden not winning Ohio and Florida didn’t mean he had no chance of becoming president. Rather, his team may want to investigate why he fell short in those critical states should the Commander-in-Chief decide to run again in 2024.
That’s not to say that the death cross isn’t significant for deciphering SPY stock. It’s just that the death cross alone isn’t a good enough reason to buy or sell the exchange-traded fund (ETF).
Why We Should Worry
Let me be clear. When I say that the death cross shouldn’t be used as a sole indicator in the decision-making process for SPY stock, I’m not subtly suggesting that you should acquire it as a contrarian play. In this case, the rising conformist sentiment appears to be gaining serious strength.
Just recently, I provided a data-driven argument why the U.S. could be facing a recession due to inflationary risks. Obviously, rising prices crimps consumer demand. In turn, employers suffer revenue and earnings losses, thereby forcing them to make cuts to payroll. This creates a negative spiral as businesses — and individuals — everywhere attempt to cut their way to safety.
One of the counterarguments, though, is rising wages, which has helped mitigate some of the damage. But the issue here is that cost of living, such as residential rentals, is far outpacing wage growth. In San Diego specifically, the percentage of household income allocated to rentals increased from 26% in 2008 to around 40% now.
Factor in explosively high energy bills, and you suddenly realize that American households have on average suffered tremendously in the new normal. And since SPY stock is tied to the blue chips that we all depend upon, the benchmark ETF is fundamentally liable to feel the heat at some point.
Sometimes, the Stated Reason is the Legitimate One
I’m not naive to the point where I don’t recognize the sexiness factor in going contrarian. Thanks to the meme-stock phenomenon, contrarianism has almost become the conventional norm.
However, with SPY stock and the pinging of the death cross, it might be best for risk-averse investors to consider the conformist approach. No, it’s not because of the death cross by itself. Rather, this time, the technicals appear to be confirming what the fundamentals have been saying for quite a while.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.