Indicator of the Week: Is the 'Death Cross' as Scary as It Sounds?

What happens with the Dow undergoes a 'death cross' near all-time highs?

by Rocky White

Published on Aug 12, 2015 at 6:30 AM
Updated on Aug 12, 2015 at 7:41 AM

Just yesterday, a "death cross" occurred on the Dow Jones Industrial Average (DJIA). A death cross is when a "fast" moving average crosses below a "slower" moving average.  In this case, it's the 50-day moving average falling below the 200-day moving average. This technical signal is supposed to be a bad omen for stocks.  Many times we look at popular bearish indicators only to find out they aren't so bearish when you actually run the numbers. This week, I'll take a close look at this indicator to see if it's really as scary as the name suggests. 

Death Cross vs. Golden Cross: The opposite of a death cross is the "golden cross." That's when the 50-day moving average crosses above the 200-day moving average -- supposed to be a bullish signal. Going back to 1950, I looked at how the Dow performed after these signals and compared them to typical Dow returns. I summarized the results -- going out a month and three months following the signals -- below.

Unfortunately, the death cross has had a tendency to lead to some underperformance. A month after a signal, the Dow has averaged a loss of 0.43%, and was positive less than half the time. Compare this to a typical one-month return of 0.67%, positive 60% of the time. Three months after a death cross, the Dow returns have been flat on average, and positive just half the time. A typical three-month return is 2%, with 64% of them being positive. Interestingly, while the death cross lives up to its bad name, the golden cross fails to deliver on its good name. The returns following a golden cross lag the typical returns of the Dow.  

150811IOTW1

Death Crosses Near All-Time Highs: The Dow currently sits about 5% below its all-time closing high. A death cross that close to its all-time high has occurred only three other times since 1950 (March 1962; March 1990; November 1999). I decided to break down those 40 previous death crosses by how close they were to an all-time high. The one-month and three-month returns are summarized below. 

More bad news. The closer the Dow is to an all-time high, the worse the returns are going forward. When the Dow is within 10% of an all-time high and makes a death cross, it has moved higher in the next month only 27% of the time, averaging a loss of 0.64%. Looking at the three-month returns, the Dow averages a loss of 1.70% if it's within 10% of an all-time high, and is positive just 40% of the time. Using history as a guide, this does not bode well for the Dow going forward.  

150811IOTW2


A Schaeffer's exclusive

6 Sectors for Summer

Access your FREE insider report before it's too late!


  
 

Partnercenter


NEW! Explore Schaeffer’s Partners' deals and get connected to top online brokerages with deals tailored exclusively for our readers.  Get answers to your questions regarding transfer fees, commission rates, programs and available discounts related to online trading services.

MORE | MARKETstories


The Next Big Player in U.S. MJ Boom
Most pure-play marijuana stocks in the U.S. trade on the Over-the-Counter stock exchange.
Wall Street Roars Higher Amid Civil Unrest
Investors weighed a mixed bag of jobs data
AstraZeneca Stock Flat Despite COVID-19 Vaccine News
AstraZeneca saw a rise in capacity for its COVID-19 vaccine candidate
The Next Big Player in U.S. MJ Boom
Most pure-play marijuana stocks in the U.S. trade on the Over-the-Counter stock exchange.