The Death Cross is back! Well…probably.
I wrote about the formation of the so called “Death Cross” in the Nasdaq Composite Index last week. I was surprised to see that this event came with little fanfare from the typical media outlets. This is probably because the occurrence was followed by one of the strongest rallies in the index that we’ve seen recently, so it was promptly dismissed as a false alarm.
The Death Cross appears that it will be making yet another appearance. This time in the national darling S&P 500. I have a feeling that a little more attention will be paid this time around.
Now, it’s not certain that the Death Cross will occur (as a reminder, “Death Cross” is the name given to the technical indicator that depicts a shift in momentum when the 50 day moving average of a security or index crosses over the 200 day moving average of the same security or index). As of this moment, it has not yet happened. However, by my math, it would take a pretty stellar sequence of returns to prevent it from happening sometime during the next seven trading sessions.
This is primarily due to the fact that the 50 day moving average is in the process of replacing seven of its highest closing values from the tail end of the average. This will quite likely pull the 50 day moving average further south. At the same time, the 200 day moving average – which fluctuates in value much more slowly than the its 50 day counterpart – will be replacing some pretty middling values, so it shouldn’t move much one way or the other. If anything, over the next seven sessions, it might actually tick up, even while the 50 day moves lower.
As I mentioned in the previous article about the Death Cross forming in the Nasdaq Composite, the apparition of this infrequent omen does not necessarily mean the end of the world. In fact, it has occurred in the S&P 500 four times since the start of the market cycle that began in March of 2009. Although none of those occurrences were particularly pleasant times for market participants, on each occasion the index went on to make higher highs, and, eventually, all-time highs.
The bad news is that there has not been a single bear market in history that was not preceded by, or followed in short order by this indicator. At this point I’m not very optimistic about the prospects for this market over the coming months, but, whether or not anyone agrees with my sentiment, the rare appearance of the Death Cross in the S&P 500 does provide us all with a reason to take inventory of our current exposures to this widely tracked index.