When Stocks Cross This Line… It’s a Bad Sign

Delray Beach, Florida – You never want to see this happen. But when it does, it’s usually not a good sign.

It’s a phenomenon known as a “death cross.”

While the name is a bit hyperbolic, this indicator can – and often does – signal an inflection point in the direction of a stock or market index.

It can even prefigure a period of stagnation for stocks… or outright carnage.

In fact, the last time the stock market experienced a death cross, stocks flatlined for nearly a year.

And before that, a death cross forewarned investors of what became the financial crisis of 2008.

Basically when a death cross appears, it’s best to pay attention.

Could a death cross be looming around the corner?

The Market’s Grim Reaper

Funny enough, the death cross and its bullish counterpart, the golden cross, are two of the oldest technical indicators around.

If the 50-day moving average crosses below the 200-day moving average, it forms a bearish indicator known as a “death cross.” And that signals that a stock could be entering a downtrend.

If the 50-day crosses above the 200-day, it’s a bullish indicator known as a “golden cross.” That often signals that a stock is entering an uptrend.

In technical market analysis, a moving average is just the average closing price of a stock (or index) over a given period of time.

The shorter the duration of a moving average, the more closely it follows a stock’s current price. But the longer the duration, the less volatile the average price will be.

For this reason, a moving average can clear away some of the white noise in a stock’s price action and help give a clearer – and smoother – picture of where it’s headed.

Moving averages are the simplest tools in the technical analysis toolbox. But don’t let their simplicity fool you. You can gain more than you’d think from watching a couple lines on a chart.

Here’s a good analogy…

A stock’s moving average could be compared to a baseball player’s batting average… It allows you to identify trends.

For example, if a player’s batting average is .300 over the last 200 days but just .220 over the last 50 days, you’d quickly recognize that the batter is in a slump.

The same is true of a stock’s moving average. If the average price of a stock over the past 50 days is lower than its average over the past 200, then that stock is in a performance slump.

Now, most technical analysts focus on two moving averages: 50-day and 200-day.

You can choose any time periods you’d like, but since crowd psychology plays a major role in market behavior, the standard 50- and 200-day averages work well.

And together they form a reliable indicator of bullish or bearish momentum.

The Last Death Cross

Let’s look at the last major death cross that occurred in the S&P 500 in 2015…

In the chart above, the blue line is the 50-day moving average. The green line is the 200-day moving average.

After a few years of positive momentum, a death cross appeared in the broad market in the middle of 2015. It heralded nearly a year of market stagnation.

The market eventually regained its strength and – following a golden cross – began to hit new highs as it resumed its uptrend.

We enjoyed this uptrend… until a few months ago.

So far, the stock market has not officially seen another death cross. But it’s getting a bit close…

“X” Marks the Drop?

Let’s take a more recent look at the S&P 500.

As you can see in the chart above, the 50-day moving average has been slowly converging toward the 200-day moving average. In fact, there’s only about a 40-point difference between them right now.

A death cross will likely occur if stocks either collapse or simply remain flat. (At this point, I’d say the latter is more likely.)

But I don’t like to interpret technical signals in absolute terms. If a death cross appears in the coming weeks or months, it should simply serve as a moment to reflect on how much risk your portfolio is carrying.

On the other hand, if stocks begin to turn around and regain positive momentum, we will avoid this bad omen altogether.

In fact, the broad market has already crossed back above its 50-day moving average… potentially signaling the end of the flatlining.

The bottom line: Don’t lose hope just yet.

Just know that using moving averages can help you get a pulse on the market when fundamentals don’t seem to be cutting it.

Signals like these can motivate you to reevaluate your current investing strategy and reallocate assets if needed.

And most important, these tools are here to help you make smarter trading decisions… not cause a panic.

Good investing,

Anthony