The 'Death Cross' Looming Over the S&P 500 Index (SPX)

The SPX's 12-month moving average is about to cross below its 24-month trendline, resulting in a "death cross"

Jun 28, 2016 at 3:23 PM
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Earlier, we looked at a potentially bullish signal on the S&P 500 Index (SPX). However, in the same article, we also cautioned readers against ignoring stock market risks -- including elevated volatility levels. Another risk worth pointing out is a potential "death cross" on the SPX.

This time around, the S&P's 12-month moving average is on the verge of crossing below its 24-month trendline. This is a relatively rare signal, having occurred just 10 times in the past 44 years. And, according to the chart below (courtesy of Schaeffer's Senior Quantitative Analyst Rocky White), the last two occurrences have resulted in extreme losses:

spx death cross june 28

As you can see, the last time the 12-month trendline fell below the 24-month was in 2008, and over the next three months, the SPX tanked nearly 24%. By six months, the loss was nearly 35%. The 2001 case wasn't as bad, but it was still really bad -- with a six-month post-signal drop of 15.2%. You can see these signals depicted visually in the graph below:

spx monthly chart june 28

Of course, historically speaking, 2001 and 2008 represent worst-case scenarios -- with the former occurring just before the Sept. 11 terrorist attacks and the latter in the midst of the global financial crisis. The average three-month return on the SPX after this type of "death cross" is a 0.1% gain, and by six months, the typical loss is a mild 0.3%.

Moreover, if you include all such 12- and 24-month "death crosses" (19 occurrences), the numbers actually begin to look bullish. Six months after the signal, the SPX has averaged a gain of 4.2% -- topping the anytime return of 3.5%. Going out to a year, the average advance swells to 12.4%, versus an anytime return of 7.4%. Of course, per the elevated standard deviations over each time frame, it's clear the S&P 500 remains choppier-than-usual -- suggesting gains and losses tend to be outsized.

spx death cross 2 june 28

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