S&P 500 chart forms the ominous-sounding ‘death cross.’ What it really means for the market

Published Tue, Mar 15 20223:11 PM EDT

The S & P 500 on Monday closed at a so-called "death cross," but technical analysts say the signal could be less ominous than the name suggests. A death cross occurs when the 50-day moving average crosses below the 200-day moving average. The pattern is typically known in markets lore as a negative signal for stocks. What a death cross means in practice is a bit more nuanced, according to Ari Wald, head of technical analysis at Oppenheimer. "Every major decline will start with a death cross, but not every death cross leads to a major decline," Wald said. An attempt at finding a floor In fact, history shows the average return for the S & P 500 after a death cross is positive, according to an analysis by FundStrat. In 48 death cross occurrences since 1929, the mean performance on a three-, six- and 12-month time frame were all positive for the S & P 500. "It can be insightful to understand the broader strength of a market or weakness at any point in time. However, trying to utilize these for trading purposes is tricky at best, and looks largely ineffective," Mark Newton, head of technical strategy at Fundstrat, said in a note Monday. Katie Stockton of Fairlead Strategies agreed. "I would say that I am generally not a proponent of using moving average crossovers for market timing/predictive value," she said. In the last four of six death crosses, the signal ended up being closer to a market low than a high, FundStrat's analysis found. Wald sees the current death cross, along with other indicators, as a sign that the market is trying to find a floor. "We think this is going to remain a corrective period for the market. But I think after this initial leg lower since the January peak, we do think that price is finding support. It's stabilizing to building a base and that does set up for what we're calling a countertrend rally to the upside," Wald said. For retail investors, a death cross could also be a time for investors to think about their time horizons. "If you have a multiyear time frame, buying around a bearish cross or a death cross is almost always a good purchase," said Chris Murphy, cohead of derivatives strategy at Susquehanna. A loss of momentum However, chart analysts did highlight that a death cross signals a loss of momentum. In a death cross, the S & P 500's short-term performance underperforms the longer-term trend. "At a minimum, it raises the bar to restart or resume the bull market," said Chris Verrone, head of technical and macro research at Strategas Research Partners. "In downtrends, rallies need to exhibit exceptional momentum to flip the script." To be sure, stocks are also contending with the ongoing war in Ukraine and the Federal Reserve's anticipated move to raise interest rates . "History suggests a near-term bounce, but unfortunately, we wouldn't put much weight on it since we still have some major headwinds to deal with," Wolfe Research's Rob Ginsberg said in a note Monday. A Fed rate hike environment rarely coincides with a death cross, according to Jeff deGraaf, founder and chairman of Renaissance Macro Research. "It's pretty unusual to have a dark cross and then the Fed raises rates," deGraaf said, preferring to use the term "dark cross" rather than death cross. "This combination of a dark cross and the Fed just starting to raise rates historically suggest that you've got underperformance in the market going forward." —CNBC's Crystal Mercedes, Michael Bloom and Darla Mercado contributed to this report.

Traders work on the floor of the New York Stock Exchangein New York, U.S., on Tuesday, March 15, 2022.

Michael Nagle | Bloomberg | Getty Images

The S&P 500 on Monday closed at a so-called "death cross," but technical analysts say the signal could be less ominous than the name suggests.