The dreaded Death Cross! It sounds more ominous than it is.
The term is used by technical analysts to add some gravity to the shift in momentum indicated by a security’s 50 Day Moving Average (a shorter-term average) crossing below its 200 Day Moving Average (a longer-term average).
Because a comparatively longer-term average has more inputs, its value shifts more slowly than a comparatively shorter-term average. So, when a short-term average crosses over a long-term average, it can indicate a shift in momentum.
At this moment, the 50 Day Moving Average of the Nasdaq Composite is in the process of crossing over its 200 Day Moving Average, forming the Death Cross:
This event has occurred five other times since the new market cycle began in March of 2009. In none of these five instances did the formation of the Death Cross end in catastrophic losses for the index. However, in all but one of these instances – the occurrence at the back end of 2012 – the appearance of this indicator did portend additional volatility, if not losses of varying magnitude in the days, weeks, and months ahead. At the very least, the Death Cross does do one thing very well. The Death Cross indicates a shift in momentum.
As of market close on November 26th, the Nasdaq Composite Index has decreased in value by 12.67% since its all time closing high on the 29th of August. Considering that the Composite was up almost 17.5% year-to-date when it closed at its high, it is easy to see that such a steep drop over a relatively short period of time certainly represents a shift in momentum.
Although it is clear that momentum has shifted, at least in the near term, there is one question on everyone’s mind. What does the appearance of the Death Cross now mean for the future of the Nasdaq Composite Index?
As can be seen in the chart above, the Death Cross can precede the worst of the worst as – as it did in 2008 – or it can indicate a brief period of transition leading to further record highs – as it did in 2012.
In my opinion, instead of trying to guess what the Death Cross, in and of itself, means for the future, it should be used as a physician utilizes a thermometer. This simple gauge can tell us that something has changed, but it will require much more information to establish a prognosis. If nothing else, it should give pause. The Death Cross appears infrequently enough in this index that there is little excuse for those who have exposure to it – or to anything that might be affected by the fluctuations of this index – to not take this indicator’s formation as an opportunity to consider how a shift in momentum might impact their investment objectives; whether it is followed by the worst of the worst or a return to the status quo.