S&P 500's Death Cross Sparks Concerns, But Historical Data Offers Hope

The U.S. stock market has recently witnessed a "death cross," a technical pattern where the 50-day moving average crosses below the 200-day moving average, sparking investor concerns. This pattern is often seen as a bearish signal, indicating a potential shift from a short-term downtrend to a longer-term decline. However, historical data suggests that this signal does not always lead to significant market downturns.

As of the latest trading session, the S&P 500 index's 50-day moving average stood at approximately 5748 points, while the 200-day moving average was at 5754 points. Despite the index closing 0.8% higher on the day, this marked the first time since February 1, 2023, that the short-term trend indicator had fallen below the long-term trend line. Earlier in the week, the Nasdaq Composite Index also experienced a death cross.

Adam Turnquist, Chief Technical Strategist at a leading financial firm, noted that while the death cross sounds ominous, historical data shows that buying at this point has often been more advantageous than selling. Over the past 50 years, the S&P 500 index has seen 24 death crosses. In 54% of these cases, the signal appeared after the index had already reached its lowest point, suggesting that the most severe declines had already occurred before the death cross formed.

In the remaining 46% of cases, selling pressure continued, with the benchmark index averaging a 19% decline from the death cross point. Notably, the death cross has preceded significant market declines in the past, such as the 21% drop in 1981, the 45% decline in 2000, and the 55% fall in 2007. However, a technical strategist from a major U.S. bank, analyzing nearly a century of data, found that the S&P 500 index has a 52% probability of declining within 20 days of a death cross, with an average drop of 0.5%. Conversely, the index has a 60% chance of rising within 30 days, with an average gain of 0.8%.

Analysts point out that the market has already experienced significant selling pressure, with the S&P 500 index narrowly avoiding a 20% technical bear market this month. Various bearish indicators, including the CBOE Volatility Index, have reached high levels, suggesting that the selling climax may have passed. Turnquist observed important capitulation signals in the overall market over the past week, indicating a potential V-shaped recovery similar to those seen in 2018 or 2020, rather than a prolonged decline.