The Volatility Discrepancy That Could Move the Market

Why the 'death cross' might be good news for Apple (AAPL) shareholders

by 12/8/2012 10:33:55 AM
Stocks quoted in this article:
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Indicator of the Week: "Death Crosses" on Individual Stocks
By Rocky White, Senior Quantitative Analyst

Foreword: There was quite a bit of news last week about a "death cross" occurring on AAPL (it happened on Friday). A death cross is flagged when a stock's 50-day moving average falls below its 200-day moving average. The chart below shows that since AAPL touched $700 in September, it has pulled back sharply, leading to the recent death cross. The last death cross on AAPL happened way back in 2008. Despite the scary name, two of the three signals on the chart below were immediately followed by big gains.

Daily Chart of Apple (AAPL), since January 2006, with 50-day and 200-day moving averages, and death crosses

In fact, I went back to 1990 to find each time AAPL made a death cross. It has happened 16 times in the last 22 years, and the returns after a death cross are summarized below. AAPL immediately struggles in the first couple of weeks, averaging a loss of 3.33%, and is positive just 44% of the time. However, after those two weeks, the returns are very impressive. In the following three months, AAPL averages an 11.67% gain and is positive 63% of the time. In short, past death crosses on AAPL marked pretty good buying opportunities.

AAPL returns following death crosses since 1990

Individual Stocks: Death crosses are usually portrayed as bearish for a stock. As we see with AAPL, this is not always true. It's good to look at stocks on an individual basis. Below is a list of stocks that, like AAPL, are very near making a death cross. These are liquid stocks that have had at least five death crosses since 1990 and have performed well historically in the three months after making a death cross. You can see AAPL would actually be third on the list (sorted by average three-month return) after EAT and EW. There doesn't seem to be any reason to fear the coming death cross on these names.

Stocks near death crosses

So, are there any stocks on which a death cross SHOULD scare you? The list below may answer that question. Below is a list of stocks -- that could soon make a death cross -- which have not performed all that well after past occurrences.

Stocks near death crosses (bearish)

Those were lists of stocks that are about to make a death cross. Below are similar lists, but they show stocks that have already made a death cross. The first list shows stocks that have performed well in the past after a death cross. AAPL, noted above, tops this list. The second table shows the stocks that have suffered losses (on average) in the three weeks following a death cross.

Recent death crosses (historically bullish)

Recent death crosses (historically bearish)

This Week's Key Events: One Last Fed Meeting for 2012
Schaeffer's Editorial Staff

Here is a brief list of some key market events scheduled for the upcoming week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.

Monday

  • There are no major economic reports scheduled for Monday. However, Teavana Holdings (TEA) is due to report quarterly earnings.

Tuesday

  • Tuesday's docket includes the international trade balance, wholesale inventories, and the National Federation of Independent Business (NFIB) small business optimism index. Elsewhere, investors will have the chance to digest earnings results from Dollar General (DG).

Wednesday

  • Import and export prices will hit the Street on Wednesday, along with the Treasury budget and the regularly scheduled crude inventories report. Also, the Federal Open Market Committee (FOMC) will reveal its latest interest-rate decision at 12:30 p.m. EST, while Fed Chairman Ben Bernanke will hold a press conference at 2:15 p.m. (EST). Companies stepping up to the earnings plate include Costco Wholesale (COST) and Joy Global (JOY).

Thursday

  • Thursday's round-up will include weekly jobless claims, retail sales, the Labor Department's producer price index (PPI) and core PPI, and business inventories. Wall Street can expect earnings reports from Verifone Systems (PAY), Ciena (CIEN), and Adobe Systems (ADBE).

Friday

  • The week concludes on Friday with the consumer price index (CPI), industrial production, and capacity utilization. There are no notable earnings results due for release.

And now a sector of note...

Housing
Bullish

We have maintained a bullish stance on the housing sector for much of 2012, and a recent pullback in the sector (and in member stocks) could represent a buying opportunity. The SPDR S&P Homebuilders Index (XHB - 25.58) -- which we like following because it's comprised of homebuilders and homebuilder-related stocks -- is currently pulling back to its 80-day moving average. This moving average, currently at $25.08, happens to coincide with the level representing the ETF's 50% year-to-date gain, at $25.65 (from its 2011 close of $17.10). Meanwhile, some other major names in the index, such as Lennar (LEN) and PulteGroup (PHM) are testing their respective 80-day trendlines; similar pullbacks in the past represented solid buying opportunities. What's more, many stocks in this sector remain highly shorted or have upgrade potential, as analysts remain skeptical, judging from the percentage of "buy" ratings. One caveat is the increased frequency of "housing recovery" and similar language that we've observed in recent weeks, even while several homebuilders were consolidating or pulling back. Also, there was a negative reaction to Toll Brothers (TOL) earnings on Dec. 4. Still, if you are looking for an entry point on homebuilders, now looks like the time. But keep your stops fairly tight, as failure at these moving averages could mean a larger pullback is imminent.

Daily Chart of XHB since July 2012 With 80-Day Moving Average

Prepare for the investing week ahead. Every week, Bernie Schaeffer and his staff provide you with their insight about what has happened and, more importantly, what will happen in the market. We dig deep and show you what's happening behind the scenes, and tell you which indicators are predicting major market moves. If you enjoyed this week's edition of Monday Morning Outlook, sign up here for free weekly delivery straight to your inbox.

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