Study: death crosses aren't bearish for the stock market


Here at Bull Markets I try to dispel conventional trading “wisdom” that’s widely accepted but is false. The media’s repetition of these statements misleads traders and investors.
I’ve recently heard some chatter about the “death cross” because the stock market has been falling a little. For those who aren’t aware, the “death cross” occurs when the 50 daily moving average falls below the 200 daily moving average. This is seen by mainstream financial media is a BIG bearish signal.
It isn’t.

Historically, the death cross has always happened during the initial 1/5 of a bear market. That makes sense. The death cross is a trend following indicator, which means that it will scream SELL during the initial 1/5 of a bear market.
However, the death cross has TOO MANY false signals. It is actually more often a medium-long term bullish signal than a bearish signal. Here are all the S&P 500’s death crosses that have occurred over the past 20 years. Extended the data to 1950 gives you the same conclusion: the death cross is not consistently bearish for the stock market. It isn’t a useful indicator.

2015-2016 death crosses

The death cross occurred AFTER the market had already crashed in this “significant correction”. Both times it occurred towards the bottom of the “significant correction”. It was a terrible medium-long term SELL signal. (S&P 500 soared throughout 2016-2017).

2011 death cross

The death cross occurred near the bottom of the “significant correction”. It was a terrible medium-long term SELL signal. In fact, this was the time to buy stocks.

2010 death cross

The death cross occurred near the exact bottom of the “significant correction”. It was a terrible medium-long term SELL signal. In fact, this was the time to buy stocks. The stock market soared over the next half year.

2007 death cross

The death cross occurred in the initial stages of the 2007-2009 bear market. Traders who used the “death cross” would have been able to avoid most of the bear market.

2006 death cross

The death cross occurred near the bottom of the “small correction”. It was a terrible medium-long term SELL signal. In fact, this was the time to buy stocks. The stock market soared over the next half year.

2004 death cross

The death cross occurred near the bottom of the “small correction”. It was a terrible medium-long term SELL signal. In fact, this was the time to buy stocks.

2000 death cross

The death cross occurred near the start of the 2000-2002 bear market. In this case it was a timely SELL signal.

1998 death cross

The death cross occurred AFTER the stock market had already crashed in this “significant correction”. It came out during the post-crash retest wave. It was a terrible medium-long term SELL signal. In fact, this was the time to buy stocks. The stock market soared throughout the rest of 1998-1999.

Conclusion

As you can see, the “death cross” is neither bullish nor bearish. It just is. It’s like stating a fact (the 50 daily moving average has crossed below the 200 daily moving average).
Death crosses can be used to get out of harms way during a bear market. But they are BULLISH signals during a bull market (when the signal comes out during a “significant correction” or “small correction). It doesn’t tell you anything about whether this is a bull or bear market.
Remember, technical analysis on its own doesn’t work that well in the stock market. You have to combine technical analysis with fundamental analysis.

8 comments add yours

  1. The death cross is useful if still active after 8 months. This would have prevented the big 50% losses in the 2000-2003 and 2007-2009 Bear markets. Long term Investors would have exited at 1250 in June 2001 and 1300 in August 2008, avoiding the worst of the fall.

      • You’re using a sample size of 2. There’s nothing meaningful about 8 months. Maybe the next bear market turns positive 9 months after the death cross.

  2. The European markets DAX30 at 12700 and FTSE100 at 7400 both completed Bear crosses in March 2018. Watching to see if the Golden cross appears BEFORE November 2018, otherwise I will be out of both markets and waiting on the side in 2019.

  3. What I get out is that the death cross may or may not successfully avoid the bear market, it may appear at the bottom of the bear market.
    But since no one will ever know, to be safe, it seems we should still sell when the 50 sma falls below 200 sma, but MUST buy back if it cross the other way when 50 sma goes above 200 sma. Am I correct?

      • Thanks.
        By the way, where can I find the S&P chart with the sma line? And what tool do you use to back test it?
        Thanks.
        Alex

        • You can use Investing.com for free for the 200sma
          Or you can use Stockcharts.com, a paid tool (which I use).
          I use Excel for the backtest. It’s not hard 🙂

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