Is the Death Cross a Useful Indicator?

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Includes: DIA, QQQ, SPY
by: Cullen Roche

At the March highs we were talking about death crosses. No, not death crosses in the S&P, but the death cross in the one equity index that has proven to be even remotely leading over the course of the last 5 years – China. Today, everyone and their mother is chattering about the death cross in the S&P 500. Is it of any use? Jeff Kleintop at LPL says it’s nonsense:

While much is made of the “death cross” of the S&P 500 50-day moving average falling below the 200-day, it has actually been a buying signal during these periods in the past. A good example of this took place in 2004 when during the soft spot in the recovery the 50-day crossed below the 200-day on August 17, 2004, just as the S&P 500 had completed the low point of its soft spot pullback and embarked upon a double-digit percent gain over the next three months.

Pierre Lapointe, a macro strategist at Brockhouse Cooper agrees:

The death cross IS nonsense. They’re no better than a flip of a coin to predict future returns. Check out these odds: Since 1970, only 10 of the 21 occurrences actually resulted in a market pullback a month after the death cross. Three months later, the market was down only 43% of the time. With odds like this, don’t short the market. Go to a casino — you’ll have more fun.

The S&P 500 and the U.S. equity market has not proven to be a leading indicator of much in recent years. Many even question its discounting capabilities at all. The moral of this story? Don’t wait until after a 15% decline in equities to jump on some technical analysis bandwagon. Especially one from an index that has proven to be a leading indicator of just about nothing.