Dear Mr. Berko:
Our stockbroker explained that the stock market broadcast a very bearish signal last August, when the indexes moved in a pattern called a death cross, which he said will crash the market. Please explain the technical term "death cross."
Our broker wants us to liquidate our $437,000 individual retirement account and invest the funds in an index annuity so that when the market crashes, we won't lose any money. We also have 300 shares of NRG Yield in another account with an 8-point loss. Should we sell this, too? His advice has ruined our planned family weekend.
-RW, Buffalo, N.Y.
Dear RW:
Your broker is a moron. May he suffer 52 weekends of formication for his asinine recommendation. And a huge "yuck" on that index annuity, including the 8 percent commission.
In the arcane world of necromancy, charting, witchcraft and technical analysis, a death cross is a crossover in which an index's or a stock's 50-day moving average falls below its 200-day trend line. This occurred Aug. 11, when the Dow Jones industrial average was 17,593, and again Aug. 24, when the Dow crashed by 1,008 points, closing down 588 points to a low of 15,350. Traders believe that this short-term pullback presages a longer-term down trend. This negative indicator also suggests that the market will experience extreme volatility in the short term.
To be a valid signal, the death cross must be reinforced by high trading volume, which further indicates that the security or index is bearish and should be sold. The Dow, the Standard & Poor's 500 index and the Nasdaq each crashed into "correction territory" in August, their first one-day 10 percent decline since 2011. The S&P 500, probably the best barometer for the market, lost $2.1 trillion in just six days. Now, $2.1 trillion may not seem like a lot of money, but it's equal to the combined market value of Google, Exxon Mobil, Kellogg Co., Apple, The Hershey Co., Berkshire Hathaway, Wal-Mart and General Mills. So far, it seems that the market has recovered. Today the death cross represents an important upside resistance level for an index or a security in a rising market.
Don't panic. Don't sell, and stay the course. In my opinion and in the opinion of others wiser than I (readers say their numbers are legion), the damage has already occurred. The market has seen only 10 death crosses since 1969, and in the 30 trading days after a cross, the averages in eight of the 10 instances were down in the neighborhood of 1.4 percent. However, three months after a cross occurred, the indexes had actually gained -- an average of 3.1 percent. And six months after a cross, the average index gain was 8.2 percent. The trick is to catch the market before a death cross occurs, but except for the astroalchemists, I don't know a single sane soul who could tell me when that's going to happen. Many believed that it would happen, but the operative adverb is "when."
NRG Yield (NYLD-$13.90), a subsidiary of NRG Energy, is an interesting power company. NYLD sells energy that it produces from its portfolio of company-owned and -operated conventional, solar and thermal energy facilities. NYLD's plants collectively produce over 3,825 megawatts of power, which is sold-under long-term contract agreements-to hospitals, universities, commercial businesses and governmental facilities in multiple locations. Don't sell this stock! NYLD, yielding 6.2 percent, may be a sweet growth and income issue, and there are only 63 million shares outstanding. Revenues for 2016 are expected to come in at $1.01 billion, up from $850 million this year, while earnings could double, to $1.17 a share. And the 84-cent dividend could be raised to 95 cents next year, providing an attractive 6.6 percent yield based upon today's price. According to Barclays, RBC Capital Markets, Deutsche Bank and UBS, NYLD could trade in the mid-$20s by early 2016. And an analyst I know at Neuberger Berman, a fund that owns 4 million shares, told me he recently bought 600 shares of NYLD for his dad.
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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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Published: Tue, Dec 08, 2015
