GE, death cross and golden cross

In one of his early books, Peter Lynch, famed manager of the Fidelity Magellan Fund (during the time when that fund had the strongest record among domestic growth funds), wrote that no one ever gets fired for buying IBM.

That is to say, many run-of-the-mill portfolio managers will stick with “safe” high-client-recognition large cap names long past their sell-by dates.  Why?   …because they think there’s less career risk for them in doing so than there is in holding earlier stage names where there’s much more upside but a bigger chance of going down in flames.  In my experience, that risk comes less from the company itself than from the PM’s not doing the continual securities analysis needed to monitor a smaller firm’s prospects.

The “safe” strategy, according to Lynch, generates at best mediocrity.

GE is a fascinating case (of the train wreck genre) in point.

As I see it, the company grew by only about 10% a year in what one might call its last  “glory days” in the 1990s.  That lackluster performance was fueled in large part by the creation of a finance division that specialized in lending to less than pristine customers.  On a stand-alone basis, the earnings from such a business typically garner only a substantially below-market multiple.  But it seems to me that GE boosters, led on by cheerleader CEO Jack Welch, never connected the dots and continued to pay super-generously for these results.

Welch’s successor had the unenviable task of straightening out the lumpy, aging conglomerate he left behind.  New management wound down the risky finance operations, but then decided to bet the farm on the consensus view at the turn of the century that the world faces a structural shortage of oil.  Ouch.

 

I have no current interest in GE as a stock.  My hunch, however, is that if I looked into the company I’d end up being more a buyer than a seller.  That’s for no other reason than it has been a dismal operating performer for a quarter century and there must be something of value inside a stock that has been beaten down so much over the past decade plus.

What prompted me to write this post, then?

 

dead cross and golden cross

I saw an article about GE by a technical analyst who asserts the stock is flirting with disaster. His argument is that a short-term moving average of GE’s stock price is just about to break below its long-term moving average.  Technicians call this a “dead cross,” a sign that investors are abandoning hope and will likely begin to dump the stock out without regard to price.

I have no belief in most technical indicators, including this one.  I like the name, though.  And if this prediction proves correct, I think it would provide a very good buying opportunity.

The opposite of the dead cross, by the way, is the “golden cross,” where the short-term moving average breaks above the long-term moving average.  This supposedly leads to strong buying action.

technical analysis: golden cross and dead cross

what golden crosses and dead crosses are

They’re cool-sounding names.

They should probably have their own tee-shirts.

But…

…what they are is technical indicators.

They’re descriptions of behavior of short-term vs. long-term moving averages.

In both cases, two moving averages, one short-term, one long-term, for the same index or security are being charted on the same graph–usually values on the vertical scale, time on the horizontal.

A golden cross occurs when the short-term moving average, which has been below the long-term moving average on the chart, crosses and moves above the long-term average.  The claim is that this signals a significant upturn.

A dead cross (or death cross) occurs when the short-term moving average has been trading above the long-term average but crosses and breaks down below the long-term averageThis supposedly signals a significant downturn.

They’re called crosses because in both cases the two lines cross one another.

different moving averages for different indices, different markets

The short-term and long-term moving averages used to determine the crosses differ both by country and with the index being analyzed.  In the case of the S&P 500, for example, technical analysts typically use 50-day and 200-day moving averages.

If the 50-day moving average for the S&P is below the 200-day, this means that more price action over the past 2 1/2 months (assuming 20 trading days per month) has been weaker than the average over the past ten-month period.  If the 50-day moving average subsequently turns up sharply enough to break through the 200-day line, proponents of the indicator believe the weakness has ended and a significant rally has started.

In similar fashion, if the 50-day moving average dives below the 200-day, then a period of strength has come to an end and significant weakness lies ahead.

my thoughts

I’m not a fan.

I first encountered people actually using the two crosses in Tokyo and Hong Kong.  That was mostly, In think, because they had nothing better.  They didn’t have professional securities analysts forecasting earnings; they didn’t apply any macroeconomic data to help figure out the general market direction, either.  So they were left with either the entrails of chickens, which would have been pretty messy, or stuff like the cross twins.

important in Asia

The crosses did then, and still do, have a significant effect in Asian markets because people use them–not that they have any particularly important objective significance..

making a comeback in the US

In the US, technical analysis, including the idea of the two types of crosses, seems to me to be making a comeback after over a half-century of neglect.  How so?

–I think some hedge fund managers who cut their teeth trading commodities are trying to use the same technical tools on stocks

–brokers fired most of their experienced analysts during the Great Recession, so there isn’t as much easily available, reliable fundamental information around as before

–discount brokers can supply technical indicators to their active retail traders at low cost.  They’re cheap; they require little effort to learn; it seems to make the customers feel good to spout obscure jargon (who doesn’t like showing off this way?); and, since the clients “read” the charts themselves, brokers don’t incur the legal liability they would if they were supplying actual stock analysis.

Why write about this now?  The Dow made a golden cross a few weeks ago and short-term traders have been making a fuss since.