Death Cross More Of A Buy Signal?

With the recent weakness in the equity markets, many stocks' and stock indices' chart patterns have traced out a death cross pattern in their moving averages. The Death Cross is a technical indication when the 50 day moving average crosses the 200 day moving average from above. As Michael Batnick of The Irrelevant Investor blog noted a few days ago, very few technical analyst use the death cross pattern in their chart analysis. However, much has been written about the death cross recently and a closer look at the pattern reveals stocks/indexes tend to be closer to rebounding subsequent to the death cross trigger than experience further weakness.

The chart below highlights the most recent occurrence of the death cross for the S&P 500 Index other than the one just occurring late last month.The below chart covers the calendar years 2010 and 2011. The orange line on the chart is the rolling three month return for the S&P 500 Index. This line has been shifted to the left by three months and shows the forward three month return from near the date the index average triggered the death cross pattern. For example, in August 2011 when the index triggered the death cross, the subsequent three month return for the S&P 500 Index was about 13.97%. Importantly, the worst of a market's decline tended to occur and end near the point the moving averages triggered the death cross.

From The Blog of HORAN Capital Advisors

The following four charts show death cross triggers back to 1999. The times in which the market continued to weaken once the death cross pattern was triggered was closer to or during recessionary economic periods.

From The Blog of HORAN Capital Advisors

Finally, below is the chart for the late August death cross for the S&P 500 Index. Is a subsequent rebound in the index more likely?

From The Blog of HORAN Capital Advisors

Moving averages are lagging indicators by the nature of their construction. In other words, the patterns traced out in the moving averages follow the price of an index or stock. When the death cross is triggered then, it is likely most of the price decline in the index or stock has already occurred. Again, the exception is around recessionary economic periods and our current view at HORAN Capital Advisors is the U.S. economy continues its slow growth pace and does not tip into recession.