An ominous ‘death cross’ has spooked traders and sparked fears the stock market could be headed for a major drop despite positive movement in the market.
The worrying sign, which has appeared before several major crashes including 2008 and 1929, is generally taken as an indicator the market is heading for a downturn.
The last time it appeared was March 2022, when the markets plunged a massive 12 percent over six months.
It was noted on the Dow Jones Industrial Average on Monday, the day before the markets saw their strongest performance since April – hitting their highest close since September 14 after being buoyed by the Labor Department’s latest inflation figures.
A ‘death cross’ is when the 50-day moving average of an index drops below the 200-day average – indicating momentum is weakening. A moving average is the average range of prices of an asset over a given period of time.
Traders have been spooked by the appearance of a ‘death cross’ on the Dow Jones Industrial Average, which can often appear before a downturn in the market
Death Crosses have been noted ahead of several big historic crashes including those of 1929, 1938, 1974 and 2008
The Dow Jones index has jumped 4.44 percent in six months, while the S&P 500 soared 8.69 percent following the news the annual rate of inflation fell slightly to 3.2 percent
The Dow Jones index has jumped 4.44 percent in six months, while the S&P 500 soared 8.69 percent following the news the annual rate of inflation fell slightly to 3.2 percent.
Investors are hopeful the cooling of consumer prices signals an end to the Federal Reserve’s aggressive interest rates hike that currently sits at a 22-year high of between 5.25 and 5.5 percent.
However, the appearance of the ‘death cross’ has worried experts as it indicates a decline in short-term momentum and a trend toward lower prices.
It can also be a red flag for a transition from a bull market to a bear market – which is when stocks experience a period of prolonged decline, encouraging sales.
Strategist David Rosenberg, president of Rosenberg Research, warned last month the Dow Jones was ‘at serious risk now of experiencing the uber-bearish “Death Cross.”‘
Analysts also pointed out a ‘death cross’ has appeared before many major historic downturns.
The death cross seen in January 2008 ahead of the financial crisis saw the blue chip gauge plummet by 30 percent over the next 12 months.
The same pattern was noted ahead of the 1929 crash before the three year bear market of the 1930s, which saw the S&P slump 83.4 percent.
The death cross seen in January 2008 ahead of the financial crisis saw the blue chip gauge plummet by 30 percent over the next 12 months
The dreaded sign has appeared despite US stocks posting their strongest results since April
They also appeared in 1938 and again in 1974, one of the worst stock market dives since the Great Depression.
Investors Jim Rogers and David Einhorn have both warned of a looming recession, Business Insider reports.
‘It’s a tricky time and we remain worried about the direction of the market,’ Einhorn said.
However, ‘death crosses’ have appeared when the market has just undergone a correction, according to Seeking Alpha.
The death cross seen in March 2020, for example, was followed by a 74.4 percent bounce over the year.
Many experts believe death crosses can also signify buying opportunities for investors, as they may be able to purchase assets while the price is low with the expectation the value will spike in future.