- The S&P 500 illuminated the death of technology for the first time in two years on Monday.
- The Cross of Death is a moving crossover strategy used by some traders as a token to sell securities.
- But historical data shows that the sales index has a less stellar record, according to Fundstrat.
The S&P 500 unveiled a bearish death signal for the first time in two years on Monday, but traders should not put too much stock in the signal, according to a note from Fundstrat technical analyst Mark Newton.
The Cross of Death is a dynamic crossover strategy used by some traders and technology analysts as a trademark mark. Occurs when a short 50-day moving average falls below the 200-day long-term average.
The residual index can help traders to warn of securities that strengthen their decline and who may find themselves continuing with lower stock prices. But because of the spread of the death cross signal, it actually paid to buy shares following the death cross rather than sell, according to Fundstrat.
"After 48 incidents since 1929, the return rate over the three, six, and 12 months has all been good for the S&P 500 with a three-month return rate of 2.1%," Newton said. Moreover, the winning rate for a good return on the S&P 500 three, six, and 12 months after the death cross was all over 50%, according to the analysis.
Only seven days and one month after the death cross when the S&P 500 produced a negative return on average. The S&P 500 on average produced a positive return of 2.8%, 4.3%, and 5.0% at three, six, and 12 months after the bearish trading signal.
But when the cross of death works hard, it works in a great way. After the death of the cross on the S&P 500 on December 21, 2007, the three-, six-, and 12-month relapses were negative 10.4%, 9.9%, and 41.5% respectively. The same negative recovery profile followed the cross-death of the S&P 500 on October 30, 2000, as well as during the Great Depression of the 1970s.
Another technology analyst who does not use a mid-range crossover signal is Katie Stockton of Fairlead Strategies. "I'm not a promoter of using crossovers for market time / forecast price. They usually don't arrive on time, and you just tell us what we already know, that momentum has changed," he told Insider last week.
Finally, mobile crossover signals are incomplete. And while all major sales in the stock market start with the death cross, not all the death crosses lead to a major decline in the stock market.
