Short-term, the death cross has been bearish for the Nasdaq, though long-term it is safe to call it a "buying opportunity"
One of the more ominous sounding indicators is the death cross. It’s a technical pattern in which the 50-day moving average on a stock or index crosses below its 200-day moving average. The indicator is considered a bearish sign and is popular in the media. It signaled at the end of last week on the Nasdaq Composite (IXIC). Below, I quantify past death crosses on the index and see if the media is justified when they refer to it as a bearish indicator.
Quantifying Death Crosses
The Nasdaq Composite kicked off in 1971 and experienced its first death cross in November of 1972. Disregarding signals that occur less than six months since the prior signal, last week marked the 26th death cross for the index. The table below summarizes returns of the index following those instances. The second table shows typical returns for the index.
In the very short term, the indicator is aptly named. The Nasdaq has averaged a slight loss a week after a death cross compared to its typical 0.24% gain. After that, however, it has been a different story. Just two weeks after a signal, the index averaged a gain of more than two times its usual performance (1.11% vs. 0.48%). Also, 68% of the returns were positive compared to 60% typically seen over two weeks. Six months after a death cross the Nasdaq averaged a gain of more than 12% with 80% of the returns positive. Typically, in six months you would have expected a 6.24% return with a 70% chance of a positive return. It’s safe to say, at least for this index, death cross is a scarier sounding name than is warranted.
Next, I’m looking at more recent figures. Going back to 2010, a bullish time for stocks after the financial crisis, the table below shows the returns for the Nasdaq Composite after each of the six death crosses. The last signal was April of 2020, as markets were already recovering from the Covid crash. In typical death cross fashion, the index was negative one week later but performed very well in subsequent time frames. A quick glance at the table shows no negative returns three and six months after one of these death crosses.
Summarizing the returns above gives you the table below. Again, the second table shows typical returns during the time period for comparison. Despite its scary sounding name, the Nasdaq Composite has performed bullishly after a death cross. When referring to this indicator, at least for the Nasdaq Composite, it would be more accurate for the media to call it a buying opportunity, rather than a bearish indicator.
