The ‘death cross’ is a market chart pattern reflecting recent price weakness. It refers to the drop of a short-term moving average—meaning the average of recent closing prices for a stock, stock index, commodity, or cryptocurrency over a set period—below a longer-term moving average. The most closely watched stock-market moving averages are the 50-day and the 200-day. Despite its ominous name, the death cross is not a market milestone worth dreading. Market history suggests it tends to precede a near-term rebound with above-average returns.
Key Takeaways
- The death cross appears on a chart when a stock’s short-term moving average, usually the 50-day, crosses below its long-term moving average, typically the 200-day.
- Despite the dramatic name, the death cross has been followed by above-average short-term returns in recent years.
- The rise of the 50-day moving average above the 200-day moving average is known as a golden cross and can indicate the exhaustion of downward market momentum.
What Does the Death Cross Tell You?
The death cross indicates that price action has deteriorated over a period of roughly two months if the crossing is conducted by the 50-day moving average. Those convinced of the pattern’s predictive power note the death cross preceded all the severe bear markets of the past century, including 1929, 1938, 1974, and 2008. This reflects a form of sample selection bias, using only select data points to support the claim, ignoring the numerous instances when the death cross signaled nothing worse than a market correction.
Research indicates that the S&P 500 index was higher a year after the death cross approximately two-thirds of the time, averaging a gain of 6.3% over that span. Though lower than the annualized gain of over 10% for the S&P 500 since 1926, it is still far from disastrous. Furthermore, the 50-day moving average of the Nasdaq Composite index falling below its 200-day moving average has been followed by significant average returns over one, three, and six months, according to historical data.
Intuitively, the death cross has tended to serve as a meaningful bearish market timing signal after market losses of 20% or more, indicating deteriorating fundamentals. Nonetheless, its overall historical record reveals that the death cross is more a coincident indicator of market weakness rather than a leading one.
Example of a Death Cross
December 2018 Death Cross
In December of 2018, a death cross on the S&P 500 illustrated its predictive prowess. It led to headlines describing “a stock market in tatters,” with the index losing another 11% over the next two weeks. However, in just two months, the S&P rallied 19% from that low and was 11% above its level at the time of the death cross less than six months later.
March 2020 Death Cross
Another S&P 500 death cross occurred in March 2020 during the initial COVID-19 panic. Astonishingly, the S&P 500 gained just over 50% in the following year.
These examples highlight varying outcomes but showcase that the death cross can represent a promising indicator of impending market improvement instead of prolonged downturn.
Death Cross vs. Golden Cross
Conversely, the golden cross happens when the short-term moving average of a stock or index moves above its longer-term moving average. Many investors view this pattern as a bullish signal, though the death cross often precedes larger gains in recent years, indicating that the gold cross might more accurately signal the end of a prolonged downtrend.
Limitations of Using the Death Cross
If market signals as simple as the interaction between the 50-day and the 200-day moving averages had constant predictive value, their reliability would diminish as market participants sought to exploit them. Recently, the death cross has made for striking headlines, serving better as a signal of short-term pessimism rather than the onset of a bear market or recession.
Related Terms: Golden Cross, Moving Average, Bear Market, Bull Market, Technical Indicators.
References
- Nautilus Research via Twitter. “CCMP Moving Average Cross Analysis”.
- Factset. “Are Golden and Death Crosses a Good Bet?”
- MarketWatch. “What Next for Stock Market as Small-Cap Index Suffers Its First ‘Death Cross Since January 2022”.
- Duke University. “Finance 453 Global Asset Allocation, Dual Moving Average Crossover (DMAC) Trading Strategy”.
- Britannica Money. “Death Cross”.
- Nasdaq. “Some Historical Perspective on the S&P 500 Index ‘Death Cross’.”
- Barron’s. “The S&P 500 Just Hit a ‘Death Cross.’ Why It’s Good News for the Stock Market”.
- Moneychimp. “Compound Annual Growth Rate (Annualized Return)”, Date Range Jan. 1, 1926 to Dec. 31, 2022.
- MarketWatch. “A Death Cross for the S&P 500 Highlights a Stock Market in Tatters”.
- Yahoo! Finance. “S&P 500 (^GSPC) Historical Data”.
- Britannica Money. “Golden Cross”.
- Yahoo!Sports. “This ‘Golden’ Technical Indicator is Triggering Across the Market”.
