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By now I’m sure some of you have read that the S&P 500 has entered — by technical terms — a “Death Cross,” an alarming name that describes when the 50-day moving average crosses below the 200-day.
This is a bearish technical development and used by some technicians as an indicator to suggest that there’s more downside to come.
Make no mistake: It is a bearish development, because it usually requires a steep decline to drag the 50-day down below the 200-day. However, I view it more as a bearish observation rather than a bearish indicator and I’ll tell you why.
It’s like finding out we’re in a recession…six months into the recession when the economy has already started to rebound. Markets are forward-looking, meaning that investors are trying to price in future realities — like earnings and margins — in the present. They don’t necessarily care that the 50-day (a lagging moving average) dropped below the 200-day (and even slower, lagging moving average).
But we don’t do things based on gut feelings or opinions here. We look at the facts and the hard data. So I went back and looked at the other seven death crosses since the S&P 500 made its Financial Crisis low in 2009.
And you know what? It’s a lot less scary than even I thought.
In almost half of the instances (3/7), the S&P 500 had already made its low for that particular pullback by the time the death cross had occurred. Additionally, the largest decline that occurred after the death cross was less than 7% in five of the seven instances. The two outside that range? Declines of 11.1% and 14.5%, respectively.
Looking back at the seven other instances over the last 15 years, we found that one month later, the S&P 500 was lower four times with a median decline of 0.9%. However, three months later, the index was higher six times with a median return of 5.9%.
When looking at 6 and 12 months later, the data points to a similarly improving situation where the S&P 500 was higher five and six times, respectively, with median gains of 10.1% and 15.5%, respectively.
The Bottom Line: The most recent death cross statistics of the last 15 years aren’t necessarily bullish, but they hardly represent the frightening premonition that the name seems to imply. It’s clear that this lagging indicator did not, even somewhat consistently, show that stocks are bound to fall off a cliff. While that doesn’t mean markets can’t deteriorate from current levels due to ongoing macroeconomic issues, a technical death cross for the S&P 500 isn’t the end-all, be-all knockout that it may seem to be. | 
