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By: Costas Bocelli — April 8, 2020

Does This Indicator Spell Doom for the Stock Market?

The dreaded “Death Cross”…

Sounds scary, doesn’t it?

It’s one of the oldest technical indicators in the book.

And get this.  It was triggered just this past week (On Tuesday, March 30th).

If you’re unfamiliar with this technical indicator, you probably surmise it can’t be anything good.

And for those that are familiar with it may be surprised to find that one of the most notorious bearish indicators may actually turn out to be more bark than bite.

The Death Cross was famous for predicting some of the most severe bear markets over the past 100 years, including 1929, 1938, 1974 and the great financial crisis of 2008.

But what can be said about the predictive nature of some of the more recent ones?

I’ll get to that in a moment.

But first, let’s get everyone up to speed.

What Is A Death Cross?

Simply put, the death cross is a technical chart pattern.

And it appears on a price chart when its shorter-term moving average, usually the 50-day, crosses below its longer-term moving average, usually the 200-day.

And a death cross was recently triggered on the most widely followed stock market index in the world.

I’m referring to the S&P 500, the primary benchmark index for U.S. Equities.

Just this past week, on Tuesday, March 30th, the 50-day moving average closed below the 200-day moving average and triggered the death cross.

(Click any image to enlarge)

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On March 30th, when the death cross was triggered, the S&P 500 closed at 2,626.

A week earlier, on March 23rd, the S&P 500 traded down to 2,191 or roughly -16% lower from where the Death Cross was triggered, and down -34% from the February record highs.

Investors relying on the Death Cross as a signal to get out of the stock ahead of a major selloff were caught in the avalanche.

In this case, the death cross was made in the rear view mirror of a major selloff.

Not helpful at all.

And since the death cross was triggered, the S&P 500 did move a bit lower.  Over the next two trading days, if fell -6%.

That’s the good news, at least for the very nimble.

But the bad news is that for those that got out, the S&P 500 has now moved above the level of the death cross.

As of yesterday afternoon, the S&P 500 was trading at 2,740, or +4% above the death cross level. So they too have been left out of the recent rally.

Now here’s the thing…

Have stocks bottomed (at the March 23rd low)? Or is this another one of those sharp bear market rallies that should be sold?

Has the Death Cross (albeit arriving a bit late) signaled that the short-term rally is an opportunity to get out before another wave of selling takes place?

Time will tell.

But what we do know about the Death Cross is that over recent history, this bearish indicator has been more bark than bite.

In fact, in most of the instances over the past decade, it turned out to be a major mistake to get out of the stock market when the death cross was triggered.

Since 2010, there were five previous death crosses in the S&P 500.

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In July 2010, the S&P 500 declined less than -1% after the death cross was triggered.  In other words, investors that acted on the indicator and got out of stocks actually sold on the lows.

Something similar happened in August 2010.  Then, when the death cross was triggered the S&P made a bottom just -2% lower.  That turned out to be a major mistake for those that bailed on the stock market.

The next death cross didn’t emerge for five more years, in August 2015.  After that death cross, the S&P 500 made another -5% modest decline.

Same goes with the next one that occurred six-months later, in January 2016.  The S%P 500 declined by -5% after the death cross was triggered.  Those that failed to get back-in missed one of the biggest runs of the bull market.

In other words, saving that extra 5% could have meant missing massive gains over the following three years.

And finally, we had a death cross in December 2018 during the last notable correction.  After the cross was triggered, the S&P 500 declined another -11%, so those that acted may have felt really good about bailing on stocks.

But again, we also saw one of the fastest recoveries off of the December 2018 Christmas Eve low as the stock market rocketed higher, never really looking back until hitting the February 2020 record highs.

Which brings us to the recent death cross that was triggered just this past week.

As I mentioned, as of now the low following that death cross represents a -4% decline.

That could surely change should the market roll over once again and take out the April 1st low of 2,470.

Like I said, we’ll have to let the price action tell the rest of this story.

But it’s looking more and more like this Death Cross has once again arrived late to the funeral.

In fact, we are now starting to see signs of bullish strength emerging among many of our internal breadth indicators. You’ll be hearing about that in the days ahead... or at least from those that are in tune with the “true market”.

We’ll have more to say about that in the coming week.

Until then, stay safe and be well.

Costas

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