Death Cross

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 of time—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.

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, usually 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 signal the exhaustion of downward market momentum.

The death cross only tells you that price action has deteriorated over a period a little longer than two months, if the crossing is done by the 50-day moving average. (Moving averages exclude weekends and holidays when the market is closed.

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. That’s an example of sample selection bias, expressed by using only the select data points helpful to the argued point. Cherry picking those bear-market years ignores the many more numerous occasions when the death cross signaled nothing worse than a market correction.

According to Fundstrat research cited in Barron’s, the S&P 500 index was higher a year after the death cross about two thirds of the time, averaging a gain of 6.3% over that span.

That’s well off the annualized gain of 10.5% for the S&P 500 since 1926, but hardly a disaster in most instances.

The track record of the death cross as a precursor of market gains is even more appealing over shorter time frames. Since 1971, the 22 instances in which the 50-day moving average of the Nasdaq Composite index fell below its 200-day moving average were followed by average returns of about 2.6% over the next month, 7.2% in three months and 12.4% six months after the death cross, roughly double the typical Nasdaq return over those time frames, according to Nautilus Research. The 23rd such occasion occurred in February 2022.

Other recent surveys of returns following a death cross have also found a positive correlation with outperformance.

Intuitively, the death cross has tended to provide a more useful bearish market timing signal when occurring after market losses of 20% or more, because downward momentum in weak markets can indicate deteriorating fundamentals. But its historical track record makes clear the death cross is a coincident indicator of market weakness rather than a leading one.

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