Understanding the Stock Market's 'Death Cross': Insights from a Leading Strategist

The stock market has recently experienced a significant event known as a "death cross," which has raised concerns among investors. This technical indicator, typically viewed as a bearish signal, has sparked discussions about the future of the S&P 500 and the overall market outlook. However, one strategist believes that there is no need for alarm, suggesting that historical trends may indicate a potential rebound.

Key Takeaways

• The S&P 500 recently flashed a "death cross" signal amid market volatility.

• Historical data shows that death crosses often precede stock market gains.

• Strategist Adam Turnquist believes the market may have already priced in losses.

• A potential rebound could occur, but the shape of recovery remains uncertain.

What Is a Death Cross?

A death cross occurs when a stock's short-term moving average falls below its long-term moving average, signaling a potential downtrend. This technical formation is often interpreted as a bearish indicator, leading many investors to sell off their holdings in anticipation of further declines.

Historical Context of Death Crosses

Despite its ominous name, historical analysis reveals that death crosses have not always led to prolonged downturns. According to Adam Turnquist, chief technical strategist at LPL Financial:

• Since 1950, the average returns for the S&P 500 following a death cross have been positive over 3, 6, and 12 months.

• The win rate for positive returns after a death cross is over 50%, with a notable 72% win rate after 12 months.

Recent Market Conditions

The S&P 500 has faced a challenging year, with a 10% decline year-to-date, largely driven by concerns over economic impacts from tariffs. The recent death cross was triggered during a sell-off that saw the index drop as much as 21% from its highs. Turnquist's analysis suggests that such significant drawdowns often lead to better forward returns:

• Death crosses occurring after a 15% market decline have historically resulted in a 12-month average return of 16%.

• The win rate for these scenarios is an impressive 83%.

Is the Market Bottoming Out?

Turnquist is optimistic that the market may have reached its bottom, citing several indicators of seller exhaustion:

• Negative investor sentiment and oversold conditions suggest a potential turning point.

• However, he cautions that the recovery may not be immediate or straightforward, indicating a preference for a more gradual recovery rather than a sharp rebound.

The Path Forward

The future trajectory of the stock market remains uncertain. Turnquist emphasizes the importance of market leadership and breadth in determining the sustainability of any rally:

• A breadth thrust, where a significant majority of stocks rally together, would be a positive sign.

• Currently, the market lacks this overwhelming momentum, leading to cautious optimism.

In conclusion, while the recent death cross has raised alarms, historical data and strategic insights suggest that investors should remain calm. The potential for recovery exists, but the market's path forward will depend on various factors, including investor sentiment and market dynamics.