Latest S&P 500 'Death Cross' Will Be Especially Painful for Investors

The stock market has been particularly volatile since early October and things are about to get worse according to Bank of America, which notes the formation of the dreaded “death cross” in the S&P 500.

Things already haven’t been going well for the S&P 500, which fell 5 percent over the past week and 8 percent over the past three months. It even dipped into correction territory — a fall of 10 percent from its recent peak — before rebounding.

A death cross happens when the 50-day moving average falls below the 200-day moving average in an index, which happened earlier this month for the S&P 500. Bank of America’s technical analysts say this time will be especially painful for investors.

Per Markets Insider:

A death cross forming in the S&P 500 is never a welcome development for investors. After all, the long-term technical indicator denotes short-term momentum is slowing, and is widely viewed as a bearish signal.

And this time around, the death cross could prove even more damaging, according to a new report from Bank of America’s technical analysts.

The current death cross — when a security’s short-term moving average falls beneath its 200-day moving average, or in popular cases the 50-day falling beneath its 200-day — which formed on December 7, features a declining 200-day moving average. That bodes particularly poorly for the market, if history is any indication.

“The effects of an S&P 500 Death Cross became amplified when the 5-period slope of the 200 day [moving average] was negative,” technical research analysts Stephen Suttmeier and Jordan Young wrote in a note to clients out Tuesday.

“This scenario, which is the present case, saw average and median returns drop by 2.72% and 4.31%, respectively for 20-day returns. Performance for all periods going out to the 195-day return window became impaired.”

death cross

Zooming out and examining more historical context for death crosses featuring falling 200-day moving averages paints an even grimmer picture.

The percentage of time the market rose following S&P 500 death crosses while the 200-day was in decline dropped to 25% from 59.43% for the 20-day return period, according to the report.

Furthermore, “the standard deviation of returns dropped across all return periods, implying more consistent inhibited returns after a Death Cross with a declining 200-day MA.”

The analysts noted the current death cross is just the 47th-ever such formation in the S&P 500 since 1928.