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'Dead Cross' Triggered—Look Out Below Large Caps

Are large-cap stocks about to nosedive?

death_cross_2_200.jpg

The "Dead Cross"—a bearish technical indicator that occurs when a market's 50-day moving average crosses below its 200-day moving average—was triggered at the end of trading for large-capstocks on Tuesday, according to Dow Jones Indexes. The Dead Cross is sometimes known as the "Death Cross."

As a result, Dow Jones says the stock allocation for its Dow Jones Golden Crossover U.S. Large-Cap Total Stock Market Index will "gradually decrease" within the next five days to 25 percent from 100 percent.

David Krein, senior director, product development and analytics of Dow Jones Indexes, says that this condition has occurred once or twice a year over the past decade, sometimes more, sometimes not at all. With regard to large-cap equities, the "Dead Cross" means that a downward trend in the market has begun or is about to begin.

"This is the only index that tracks this occurrence," he says. "The index is making the decision that investors would have had to make themselves." The indicator is a warning, says Krein that investors in large-cap equities "should begin exiting from the market" and move into less-risky assets.

A dramatic example of the "Dead Cross" occurred following the market peak in 2007 through the market trough in 2009.

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Dow Jones Golden Crossover U.S. Large-Cap Total Stock Market Index
Dow Jones U.S. Large-Cap Total Stock Market Index
Peak Date Oct 2007 Oct 2007
Drawdown -21.92% -50.47%
Trough Date Feb 2009 Feb 2009
Drawdown Duration (months) 16 16
Recovery Date Nov 2009 N/A
Recovery Duration (months) 9 N/A
Required Back to Peak Recovered N/A

In this case, investors who've tracked this technical indicator would have cut their losses by more than half and would have fully recovered losses by November 2009.

Since Dec. 31, 1999, through June 30, 2011, the application of the index's Golden Crossover system has outperformed the buy and hold position of the Dow Jones U.S. Large-Cap Total Stock Market Index by 4.44 percent and decreased volatility by nearly 6 percent on an annualized basis, Dow Jones said in a statement.

CORRECTION:
An earlier version of this story incorrectly defined "Dead Cross." It is when a market's 50-day moving average crosses below its 200-day moving average.

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Disclosures:

Neither analyst owns shares of the companies mentioned but their employers have investment banking relationships.

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