The S&P 500 Index entered a “death cross” technical pattern on Monday for the first time since March 2020, becoming the last major U.S. stock-market index to fall into the bearish formation this year.
The chart pattern appears when an index’s short-term 50-day moving average crosses below its longer-term 200-day moving average, and it has at times presaged further near-term weakness. It occurred in November 1999 during the peak of the dot-com era, in October 2000 after that bubble burst and again in December 2007 ahead of the global financial crisis.
But historically, the death cross pattern has been a lagging indicator, meaning that by the time it appears the S&P 500 typically is already in or nearing a double-digit decline. Indeed, the S&P entered a death cross on March 30, 2020, when global markets were battered by the pandemic, but it actually bottomed seven days earlier on March 23.
“Over the past decade, a death cross certainly hasn’t been ominous,” Willie Delwiche, investment strategist at technical-analysis service All Star Charts, said in a phone interview. “Most corrections since then have been short-lived, so by the time the two moving averages cross over each other, the damage is done. If the bottom isn’t in place, it’s getting close.”
The tech-heavy Nasdaq Composite Index entered a death cross last month, while the blue-chip Dow Jones Industrial Average formed one earlier this month.
Prior to Monday, the S&P 500 had formed the pattern 25 times since 1970, according Delwiche. The index’s median returns over the next one, three and 12 months were 1.4%, 4.5% and 11.4%, respectively. The S&P 500 averaged a drawdown of 13.6% from its peak in those occurrences. In this case it has already shed 13% since closing at a record on Jan. 3.
Still, technical analysts aren’t convinced the equities selloff is over yet. There has been a lack of a “breadth thrust,” where advancing stocks overwhelm declining ones. And then there’s inflation, which keeps rising, and the Fed, which is getting ready to raise interest rates to curb it.
“There are reasons to be concerned right now, but a death cross isn’t one of them,” Delwiche added. “Until we see some breadth thrusts, we shouldn’t trust these rally attempts. We’re in one of those periods where stocks need to correct and pullback.”
