Are “Death Crosses” Useful Indicators On When To Buy & Sell?

…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 as a BIG bearish signal. It isn’t. It is actually more often a medium-long term bullish signal than a bearish signal. Below are all the S&P 500’s death crosses that have occurred over the past 20 years and [they substantiate that] it isn’t a useful indicator.

The original article has been edited here for length (…) and clarity ([ ]) to provide a fast & easy read

• 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.

Below 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…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…

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