Should You Short These Stocks After a Death Cross?

The IYK ETF saw its 50-day and 200-day trendlines cross this week

Apr 4, 2018 at 2:24 PM
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There's been some chatter recently about major European stock indexes forming a "death cross" on the charts, which occurs when a short-term moving average crosses below a longer-term moving average. This is thought to be a bearish sign, signaling an oncoming decline for an equity or index. However, amid the recent stock market rout, several U.S. stocks and a handful of exchange-traded funds (ETFs) have also experienced the ominous-sounding death cross, including blue chip McDonald's Corporation (NYSE:MCD) and the iShares U.S. Consumer Goods ETF (IYK)

Most commonly, a stock or index's 50-day and 200-day moving averages are used to determine when a death cross occurs. On the flip side, when a 50-day trendline moves back above a 200-day, it's considered a "golden cross" -- thought to be a bullish technical signal.

Dow Stock MCD Staring Up at Death Cross

Below are the stocks that have made a death cross in April, courtesy of Schaeffer's Senior Quantitative Analyst Rocky White. We included only optionable stocks that trade at least a million shares per day, and that closed above $7 yesterday.

stocks recent death crosses

McDonald's stock's 50-day and 200-day moving averages made a death cross on Tuesday. MCD shares have struggled since touching an all-time high of $178.70 in late January, due to the February stock market correction and a negative analyst note in early March, which sent the equity gapping to its lowest level since June.

The last time these trendlines made a death cross, back in 2016, MCD stock subsequently sank deeper into the red over the next few months. What's more, the pair of moving averages are in the same neighborhood as a 23.6% Fibonacci retracement of MCD's rally off its 2016 lows to the aforementioned January high, so the $163 level could continue to act as multi-layered resistance in the near term. At last check, McDonald's stock was down 0.1% at $160.14.

mcd stock chart

Despite the blue chip's struggles, however, options traders have been upping the bullish ante. On the International Securities Exchange (ISE), Chicago Board Options Exchage (CBOE), and NASDAQ OMX PHLX (PHLX), the security's 10-day call/put volume ratio of 2.00 is in the 91st percentile of its annual range. This means that MCD options buyers have picked up calls over puts at a much faster-than-usual clip in the past two weeks.

Analysts also remain confident in MCD. The stock boasts a whopping 21 "buy" or better ratings, compared to five lukewarm "holds" and not a single "sell." Plus, the average 12-month price target of $187.04 represents a premium of nearly 17% to the current share price, and stands in uncharted territory.

Should MCD's death cross prove ominous, an exodus of option bulls or a round of negative brokerage notes could translate into additional headwinds for the fast-food titan.

ETFs Making Death Crosses

Meanwhile, only a handful of ETFs have made death crosses in 2018. The most recent was IYK -- which includes car stocks General Motors (GM) and Ford Motor (F) among its top holdings. Both equities, along with several other U.S. automakers, are struggling in the wake of potential Chinese tariffs, and fellow IYK holding Tesla (TSLA) has also had a rough month.

etfs at death crosses

IYK shares were hit hard during the February correction, and touched a new annual low of $115.32 on April 2 -- just over two months after reaching an all-time high of $130.92 on Jan. 24. The fund found a floor in the $116-$117 region, which represents a 61.8% Fibonacci retracement of its rally from its late 2016 lows to the aforementioned peak. IYK was last seen up 1% to trade at $119.15, shaking off early trade-war-related losses, but is staring up at a 50% Fibonacci retracement of that rally.

IYK chart

Amid its fall from grace, short sellers have been piling on the consumer goods ETF. Short interest skyrocketed more than 400% in just the most recent reporting period. However, U.S. ETFs in general just saw a second straight month of outflows -- a first since 2008.

Are Death Crosses Really Death Warrants?

In conclusion, MCD and IYK shareholders may not want to cash in their chips just yet. Looking at data since 2016, a death cross has actually preceded more bullish price action for stocks and ETFs vs. a golden cross. According to White, stocks that suffered a death cross went on to average a one-month return of 2.29% -- more than double the average return after a golden cross. Meanwhile, ETFs that saw a death cross went on to average a one-month gain of 1.36%, compared to an average loss of 0.3% after a golden cross.

stocks after death crosses since 2016

etfs after death crosses since 2016

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