The Dow is nearing the dreaded 'death cross.' What investors should know

Published Wed, Nov 1 20231:17 PM EDTUpdated Wed, Nov 1 20233:43 PM EDT

The Dow Jones Industrial Average is nearing a point that can signal investors are bearish, the latest example of how outperformance among major technology names is masking an otherwise weak market. The blue-chip index's shorter-term, 50-day moving average is nearing its longer-term, 200-day moving average. If the two cross over, it would form the dreaded "death cross," which can indicate that momentum is weakening or sentiment is souring — and more downside could be on the horizon. It would be the first death cross for the average since late 2022. Technical experts are watching for the cross, while also keeping the caveats of the Dow as a price-weighted index in mind. It also connects to broader market concerns around a group of rallying technology names disguising poor fundamentals. "It is not a primary indicator, but of course is not a good situation in the short term," said Todd Walsh, chief technical analyst of Alpha Cubed Investments. "It does not always accurately predict lower markets, but it is definitely a red flag and a cautionary input." In addition to concerns over poor sentiment and momentum, analysts said the odds of a mistake or left field event like a crash or bear market increase after a death cross has formed. For Renaissance Macro Research Chair Jeff deGraaf, it's clear that being out of the Dow in a death cross can remove exposure to the worst events or market slides. He pointed to the fact that investors had roughly the same annualized return with only about two-thirds of the volatility since 1986 when following the cross. Further, he noted that investors staying out when the death cross was formed only lost 59% of the indexs value during the 1929 crash, while it as a whole plummeted a whopping 89%. "That's not great, but it's better," said deGraaf, who said exposure to the 30-stock index should be lower when the trend is negative and higher when it's positive. "And importantly, it got you back invested in 1932, when everyone else had lost hope." To be sure, analysts emphasized the Dow is unique from some other composites as a price-weighted and value-oriented index. But it can at least indicate sentiment on a group of well-known stocks, they said. 'Something bad could happen' The threat of a death cross also underscores challenges specific to the Dow this year. It's near flat compared with the start of 2023, while the S & P 500 and Nasdaq Composite have climbed nearly 10% and 24%, respectively. .DJI .SPX,.IXIC YTD mountain The Dow vs. the S & P 500 and Nasdaq, year to date That divergence has come as strong performance of the "Magnificent Seven," a group of rallying technology names, has overshadowed otherwise weak fundamentals. John Kolovos, head of technical strategy at Macro Risk Advisors, said if the Dow proves to be in a bear market, it would mean the rally seen since last October was simply a head fake. In a worst-case scenario, the Dow could fall to around 27,670, which equates to a 16.3% drop from Tuesday's close, he said. But there are also support levels attached to points on any potential path downward. A major one will come at the March low of around 31,400, Kolovos said. Alpha Cubed's Walsh said a recovery in the blue-chip index is tied in part to the Federal Reserve. The index could rebound if the central bank, which is widely expected to keep interest rates steady at its Wednesday meeting, signals it will become more data dependent when setting monetary policy. If not, he said to expect more volatility ahead. Oppenheimer managing director Ari Wald advised investors to stay away from indexes near or at the death cross like the Dow or the Russell 2000 . Instead, he pointed to opportunity in the technology-heavy Nasdaq 100 . Kolovos, meanwhile, warned that the S & P 500 is about two weeks away from forming its own death cross unless the broad-based index rallies. Ultimately, technical analysts argue the death cross is both an important yet flawed measure. And investors should be cautious, they said, on the blue-chip names that make up the average. "With this trend signal occurring, you have to be on heightened alert that something bad could happen," Kolovos said. "The odds have been raised significantly that could happen."