Death Cross: What It Is and How It Affects Your Investments

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The world of stock investing can often seem daunting, especially for newcomers. One concept that often comes up is the “death cross.” What is it and why should it matter to you as an investor? Here’s the rundown.

What Is the Death Cross?

In the realm of stock trading, a death cross is a technical indicator that signals potential trouble ahead for a stock or an index. It occurs when a stock’s short-term moving average, typically the 50-day moving average, crosses below its long-term moving average, often the 200-day moving average. This event is considered a bearish –a potentially negative sign — and is closely watched by investors.

How Does the Death Cross Happen?

To understand the death cross, it’s important to grasp the concept of moving averages. These averages smooth out price data over a specific period, making it easier to spot overall trends. When the short-term trend — a 50-day average — falls below the long-term trend — a 200-day average, it’s a signal that short-term declines are outpacing long-term gains.

When the short-term moving average falls below the long-term moving average, it’s an indication that traders are growing bearish over the short term. This can create further selling, as investors who follow technical analysis will tend to sell their stocks until the 50-day reverses and crosses the 200-day on the upside.

What’s the Difference Between the Death Cross and Golden Cross?

If a stock’s 50-day moving average reverses course and moves back above its 200-day moving average, it’s dubbed an equally colorful name by stock traders — the Golden Cross.

What Is the Golden Cross?

The Golden Cross is simply the opposite of the Death Cross, making it a bullish signal instead of a bearish signal. This tends to draw investors back into a stock, as it indicates market momentum and potentially that the stock has solved its short-term problems.

In a nutshell, if you’re an investor who believes in technical analysis, you should sell when a stock reaches a death cross and buy it back after it reaches a golden cross.

How Can the Death Cross Affect the Market?

The death cross is significant because it suggests a shift in momentum from positive to negative. This can be an early indication of a longer-term downtrend in the stock’s price. For example, if a well-followed index like the S&P 500 experiences a death cross, it could indicate a broader bearish sentiment in the market.

As the market often trades on emotions in the short run, a market selloff can occur after a death cross. While short-term market dips are often bought, a death cross can indicate deeper problems with the market, and it can trigger additional selling.

Of course, the market’s long-term tendency is to go up, and it has always historically gone on to make new highs no matter how large of a selloff preceded that.

For example, according to Dow Jones Market Data, of the 53 times the S&P 500 has closed after a death cross, it has gained an average of 6.3% in the following 12 months. Fundstrat also notes that in two-thirds of cases, the market was higher 12 months after a death cross.

As the Corporate Finance Institute points out, the death cross is a lagging indicator, and a stock or index has already begun dropping in price by the time it occurs. For that reason, the firm recommends using the death cross only in conjunction with other indicators.

Examples of the Death Cross in the Market

The death cross makes sense on paper, but how has it played out in real-world scenarios? Here are a few examples.

Case Studies: Historical Examples

• 2008 Financial Crisis: One of the most predictive death crosses in history occurred in December 2007, forecasting the economic recession and bear market of 2008. From October 2007 until March 2009, the market lost roughly half its value, according to the Trading Analyst.
• PHLX Semiconductor Index: According to Investor’s Business Daily, the PHLX Semiconductor Index hit a death cross on March 17, 2022, with chip stocks in the index falling 10% over the next month and 23.4% over the following three months. On Dec. 31, 2024, the index reached another death cross, potentially a bad omen for 2025.
• S&P 500 in 2020: The S&P 500 death cross of 2020 is a great example of how the death cross doesn’t always work. The market selloff in early 2020 was so steep and sharp — the shortest bear market in history — that the death cross didn’t even occur until April, when the market was already sharply rebounding.

Conclusion

The death cross can be a valuable tool of your investment strategy, as it may offer insights into market trends and help you make wise investing decisions. However, it’s best used alongside a broader strategy and a clear understanding of your financial goals and risk tolerance.

The death cross is far from a 100% reliable indicator, as some of the examples above highlight. Successful investing isn’t just about reacting to one signal but about taking a well-rounded approach.

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