Bear Market?

I have just returned from my family’s annual vacation at Fernandina Beach. Fernandina Beach is the northern part of Amelia Island, the northernmost barrier island in Florida. The town of Fernandina Beach is one of the oldest in the country. Its history is fascinating.

It was first settled by the French in 1562. Spain took control a few years later and held it until 1702, when the Santa Maria mission was abandoned.

In 1710, England took over (even though it was still officially a Spanish possession) and renamed the island Amelia Island for King George II’s daughter. The Treaty of Paris in 1763 gave England’s title to Amelia Island, and the second Treaty of Paris in 1783 gave it back to the Spanish. 

Around 1812, President James Madison gave a group of rebels known as the “Patriots of Amelia Island” permission to take the island from the Spanish. The Spanish took it back in 1813. Then in 1817, a Scotsman named Gregor MacGregor and 55 soldiers took the island from the Spanish.

It may not be a big surprise that Scottish control of Amelia didn’t last long. Spain forced MacGregor out quickly, and things got really weird when a couple of Americans teamed up with French-born pirate Luis Aury and claimed the island for Mexico.

President James Monroe sent the U.S. Navy to take it back, intending to hold Amelia Island in trust for the Spanish. But then the Third Regiment of Florida Volunteers in the Confederate Army took it over in 1861.

The Union Commodore Samuel Dupont took it back for the final time in 1862 with the help of 28 gunboats.

My family and I just want the island for a week each August to lounge on the beach, eat, drink, and play Texas Hold ‘Em…

We have a longstanding tradition that each branch of the family cooks dinner one night. I don’t want to say that we outright compete on who can put together the best meal, but I think I won this year…

I started with grilled Oysters Rockefeller. My daughter, brother, and I shucked about 90 oysters and dripped some garlic butter on them, sprinkled them with bacon, wilted spinach, and grated parmesan, and then grilled them till the butter sizzled.

So unbelievably good (and labor intensive) that I forgot to take a picture. But I did get a shot of the main course, grilled pompano…

I got the fish from Atlantic Seafood, the best seafood shop I’ve ever seen. They have a guy that follows the fish along the coast and brings them in fresh every couple of days. These beauties were delivered that morning.

We said goodbye to Amelia Island on Monday, and I’m back to the grind, feeling refreshed and rejuvenated (which is not easy at my age).

It’s Always Something…

It never fails that fairly significant market news happens while I’m on vacation. This year, it was China’s devaluation of the yuan.

The 2% drop in the yuan’s value sparked a ~250-point sell-off on the Dow Industrials that created a bearish technical pattern called the Death Cross.

A Death Cross happens when the 50-day moving average (MA) crosses below the 200-day moving average. It looks like this:

The blue line is the 50-day MA, and the red line is the 200-day MA. Moving averages are a popular way to monitor the trend. They plot the average closing price over a certain period of time — in this case, 50 and 200 days.

The 50- and 200-day time periods attempt to show the strength of the short-term (50-day) and long-term (200-day) trends for stock prices. When both averages are moving higher, it suggests a solid uptrend.

But when the moving averages turn down, it suggests the trend may have changed. People tend to treat the Death Cross as a sign that the uptrend we’ve enjoyed for six years has, in fact, changed direction. So yes, yesterday’s action may have been quite significant. How significant remains to be seen…

There have been 74 Death Crosses since 1900. The last came in 2011. And while the name sounds pretty ominous, it doesn’t always mean certain death for the bull market.

The Dow Industrials were already down around 12% when 2011’s Death Cross emerged. Prices fell another ~5% before reversing. The Dow has rallied steadily ever since. Buying the 2011 Death Cross was the right call.

But this one might not be the buying opportunity we saw in 2011…

Trouble Ahead

I’m going to share a chart from a portfolio manager named Ryan Detrick (his Twitter handle is @RyanDetrick). This chart shows that a Death Cross after a long rally is often a significant top for the markets:

Click Image to Enlarge

This chart shows 10 other times when a Death Cross appeared after the Dow rallied for 500 days or more. The six-month return after the Death Cross appeared averaged 2.8%, and the 12-month return averaged -5.83% — in other words, not very good.

You may hear that the Death Cross means a bear market is at hand. That’s not necessarily so. But the Death Cross does suggest that stocks in general aren’t going to put together a significant rally anytime soon.

If you check the macro news, this makes sense. The Fed’s about to hike rates, global growth is crappy, U.S. corporate earnings growth is slowing, and China has yet to solve its growth issues (as evidenced by the yuan devaluation).

Until next time,

Until next time,

Briton Ryle

@BritonRyle on Twitter

The Wealth Advisory on Youtube

The Wealth Advisory on Facebook

A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.