Some Historical Perspective on the S&P 500 Index "Death Cross"

As equity markets continue to seek footing, moving averages continue to roll over, as the S&P 500 (SPX) underwent the “Death Cross” yesterday when its 50-day moving average fell below its 200-day moving average. The death cross is a technical chart pattern indicating the potential for a major selloff. The death cross appears on a chart when a stock's short-term moving average crosses below its long-term moving average. The last time the S&P 500 saw its 50-day drop below its 200-day was December 7 of 2018, later to experience the “Golden Cross” (50-day moving average going above 200-day moving average) on April 1 of 2019.

Perhaps a way to rationalize this “delayed” cross, especially after rebounding the past few days is: The old bull market highs continue to drop off the rolling calculations, allowing the more recent days of lower readings to take greater mathematical effect on the moving average calculations. Remember that we were at all-time highs just 30 trading days ago!

While the terminology may sound ominous, the death cross is not that uncommon, especially when compared to the recent historic movements we’ve seen in the market. The table below gives an overview of historic crosses and respective drawdowns. The drawdown column uses the closing value of the death cross initiation date for SPX and subtracts the lowest closing value for SPX over the timeframe until the 50-day moved back above the 200-day.

Note a few instances where the drawdown is zero, meaning the death cross date was actually the lowest close during the timeframe. When aggregating the data from 1929 – 2019, we note an average drawdown of -12.57%, median of -7.75%, and maximum of -78.84% (1930s). If only looking at data from 1950 onward, we note an average drawdown of -10.37%, median of -5.38%, and maximum of -53.44% (2008).

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The S&P 500 now joins the Dow Jones Industrial Average (DJIA), which underwent the death cross at the beginning last week. That said, the Nasdaq Composite (NASD) remains the lone domestic equity index of the major trio with its 50-day moving average above its 200-day moving average, however, NASD's 50-day moving average is nearing its 200-day.

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