On Monday I started seeing the ominous headlines on financial television and websites. The S&P 500 had just made a “Death Cross”, defined as when the 50 day moving average of stock prices crosses below the 200 day moving average. While the term sounds serious, is this something investors should be worried about?
Per the chart above, the 50 day moving average of the S&P 500 has dropped below the 200 day moving average. Contrary to what the media would have you believe, these events happen regularly, every couple of years on average. However, since we humans have notoriously short-term memories, each occurrence gives financial websites and CNBC another headline to keep nervous investors watching and clicking. Fear sells.
The Death Cross is not a great indicator
The table below shows every death cross since 1929. A summary of average performance and win ratio (percentage of time returns were positive) is at the bottom. Based on the win ratio percentage, this indicator by itself is about as good as flipping a coin in predicting market performance over the short term. At 12 months out, it’s actually a contrary indicator.
But it still can be useful
So investors shouldn’t pay attention to it? Not exactly. One reason the Deach Cross still makes headlines is that when it’s right, it’s predicted some ugly bear markets. Two that most of us have either heard about or experienced were the 2000 dot com crash and the great financial crisis in 2008.
Serious investors know that there are no individual metrics which can accurately predict market moves. However, the death cross can be useful if it is taken into consideration as just one of a number of indicators. A weight of the evidence approach if you will.
Right now, only a few metrics are flashing a warning signs, so it’s likely this death cross will not lead to a serious bear market. Of course that could change if more economic and market indicators begin turning negative. It’s been an interesting year so far to say the least. And based on everything going on right now, that’s not likely to change for a while.