What the ominous-sounding indicator really means for stocks
There's been a lot of media attention lately on "death crosses" -- when a longer-term moving average crosses above a shorter-term trendline. Typically, Wall Street considers the 50-day and 200-day moving averages for this ominous-sounding technical indicator, thought to be a predictor of bearish price action. However, below we break down what recent death crosses have really meant for equities, and list the liquid stocks -- including Nvidia Corporation (NASDAQ:NVDA) -- and exchange-traded funds (ETFs) that have experienced a death cross during the recent sell-off.
Below are the S&P 500 Index (SPX) members that have made a death cross in the past three trading sessions (since Thursday, Nov. 15), per Schaeffer's Senior Quantitative Analyst Rocky White. In addition, we list the ETFs that have made a death cross since Oct. 1. Along with FAANG names Netflix (NFLX) and Alphabet (GOOGL) is Nvidia stock, which has been battered recently with the semiconductor sector, represented by the VanEck Vectors Semiconductor ETF (SMH), which made a death cross of its own last month.
NVDA's death cross occurred on Nov. 13, just days before the shares gapped lower on earnings. Today, the security fell as low as $133.31 -- a new annual low -- before turning higher on a Citron Research endorsement. Specifically, the notorious short seller said it's buying Nvidia shares, as "this is the first time in two years [the] stock offers an appealing risk-reward to investors." At last check, the shares were 3.2% higher to trade at $149.38.
However, while NVDA's death cross did precede a massive bear gap, these technical signals haven't been nearly as bearish as they sound. Since 2016, there have been just under 1,000 death crosses on S&P stocks. On the other hand, over 1,000 SPX members have enjoyed a "golden cross" -- when the 200-day moves back below the 50-day trendline, thought to be a bullish stock indicator.
Despite their names, the death cross has actually preceded stronger price action for the underlying over the next month, compared to the golden cross. On average, SPX stocks have added 1.43% a month after death crosses, compared to just 0.56% after golden crosses. That gap is similar when considering all stocks. After those death crosses, the average one-month return was 1.8%, compared to 1.02% after a golden cross.
