The Dow's Dreaded Death Cross -- Here's How to Play It...

What a ride!

Stocks cratered once again yesterday morning, spooked by another round of Chinese currency devaluation. But after bottoming out, the Dow made up a 250-point deficit to finally close near breakeven on the day.

Man, that’s some seriously insane market action! A roller coaster’s smoother…

And today you’re going to learn about a unique market phenomenon that occurred yesterday that many think could mean the end of the bull market.

I’m talking about yesterday’s much-ballyhooed Death Cross in the Dow Industrials. It’s the latest buzzword hitting the financial media. And just like the equally scary-sounding Hindenburg Omen, this indicator is also a little overhyped—and misunderstood.

But I’m also going to how you another Dow metric you need to keep a close eye on. But first the Death Cross…

A Death Cross occurs when a stock or index’s 50-day moving average crosses below its 200-day moving average. And this most recent Death Cross is the first one the Dow has posted since December 2011…

Here’s a look at the Dow’s Death Cross in all its terrifying glory:

A Death Cross occurs when a stock or index’s 50-day moving average crosses below its 200-day moving average. And this most recent Death Cross is the first one the Dow has posted since December 2011…

Here’s a look at the Dow’s Death Cross in all its terrifying glory:

A Death Cross Cometh

To the average financial-squawk listener, the death cross is naturally an imminent threat of a market purge the likes of which we haven’t seen in years.

But history says that just ain’t true. Despite the scary name and implication, the death cross really doesn’t predict much of anything at all.

The incomparable Barry Ritholtz sums it up nicely here:

“Looking at the past 100 years, [Bespoke Investment Group] wrote that ‘the index has tended to bounce back more often than not.’ Shorter term (one to three months), however, these crosses have been followed by modest declines in the index,” Ritholtz says. “How modest? The average decline is 0.17 percent during the next month and 1.52 percent the next three months. By comparison, Bespoke notes, during the past 100 years the Dow averages a 0.62 percent gain during all one-month periods and a 1.82 percent rise during all three-month periods.”

In other words, the Death Cross isn’t some magical indicator predicting a catastrophic drop. Yawn.

Instead of focusing on catchy buzzword indicators, there are, ya know, some actual market statistics you should follow instead. And yeah, not all of ‘em are bullish. For instance: more than half the stocks in the S&P 500 are now considered to be in correction territory. The major averages just aren’t telling this story. Yes, the S&P is up a little more than 1% this year. But to the average investor there’s not much to celebrate. Most folks’ stocks are going one of two places: nowhere or down.

Good luck convincing them we’re in a bull market. No, the big averages aren’t drowning yet. But a lack of follow-through has tossed us right into a stealth bear market that’s chewed away at gains for the better part of the year…

So to cut through the noise, here’s what you should be watching now:

Dow 17,170.

It doesn’t sound nearly as scary as a death cross. But I’m much more interested in the 17,170 level on the Dow than any death cross (it briefly broke below that mark early yesterday before its afternoon comeback). That’s the Dow’s February low—and where a potential Dow Theory sell signal would occur.

A Death Cross won’t kill the Dow. But a big break below 17,170 just might. If we lose it, it’ll be time to start planning for a graceful exit.

So forget about the death cross. And start thinking about Dow 17,170…

Regards,

Greg Guenthner
for The Daily Reckoning

P.SWill the Death Cross live up to its name? If you want to cash in on the biggest profits this market has to offer, sign up for my Rude Awakening e-letter, right here. Stop missing out. Click here now to sign up for FREE.