Analysts have warned investors not to panic over a so-called “death cross” that has spooked investors and fueled fears that the stock market could be heading for a downturn.
The Dow Jones Industrial Average saw the technical pattern on Monday, the day before the market posted its strongest performance since April supported by the Ministry of Labour latest inflation figures.
A death cross occurs when an index’s 50-day moving average falls below its 200-day average, indicating momentum is weakening. A moving average is the average price range of an asset over a given period of time.
The pattern effectively tells investors that prices have deteriorated in a short period of time. The sign has appeared before several major crashes, including in 2008 and 1929. The last time it appeared was March 2022, when markets plunged 12 percent in six months.
But Todd Walsh, chief technical analyst at Alpha Cubed Investments, told DailyMail.com that the death cross appears to be touch-and-go, and a small part of a bigger picture.
The Dow Jones Industrial Average saw a deathcross on Monday, which is when an index’s 50-day moving average falls below the 200-day average
“Death cross is one of those terms that catches people’s attention, but it’s important to put it in a broader context,” he said.
“If we get a death cross on one index, we have to put it in the context of what else is going on.”
He continued, “If you think of twenty people sitting around a table at a board of directors meeting and one of them raises his hand and says, ‘I see a death cross,’ but the other nineteen report positive results, then you tend not to do that. places a lot of weight on one negative technical reading.
‘You can’t give it too much weight. You need it to be within the framework of a consensus on negative indicators happening at the same time, and we don’t see that.
“Not only that, but the death cross we see on the Dow Jones looks more like a touch-and-go. It looks like it’s just hitting and going up, instead of collapsing.”
Todd Walsh, chief technical analyst at Alpha Cubed Investments, said it is important to consider the Dow Jones death cross in relation to the broader context of the markets.
Following news Tuesday that annual inflation fell slightly to 3.2 percent in October from 3.7 percent in September, the Dow Jones rose 1.4 percent, while the S&P 500 rose 1.9 percent.
Investors are hopeful that the cooling in consumer prices will signal an end to the Federal Reserve’s aggressive interest rate hike campaign, with interest costs currently at a 22-year high of between 5.25 and 5.5 percent.
The Dow Jones is an index of 30 major American blue chip companies, including American Express, Disney, JP Morgan Chase and McDonald’s.
The index represents “the heart of corporate America at any given time,” Walsh said, but includes more mainstream economy or value stocks that aren’t necessarily as growth-oriented as other companies.
“There’s a phenomenon going on in the market right now where you have the ‘Magnificent Seven’ stocks and a few others that really carry the full weight of the S&P 500,” Walsh said.
The ‘Magnificent Seven’ are technology shares Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
“Then you have what I call ‘The Forgotten 493’, which are outside the ‘Magnificent Seven’ – and those are your shares in the real economy,” he said.
Following news Tuesday that annual inflation fell slightly in October to 3.2 percent from 3.7 percent in September, the S&P 500 index rose 8.69 percent
Of the “Magnificent Seven” stocks, only Microsoft and Apple are included in the Dow Jones index, Walsh noted.
While Walsh believes we are in a “bull” market – when prices are rising and buyers are encouraged – other analysts have argued that a death cross is a warning sign of a transition from a bull market to a bear market – which is when stocks enter a period of prolonged decline.
Strategist David Rosenberg, president of Rosenberg Research, said last month that the Dow Jones was “now at serious risk of experiencing the uber-bearish death cross.”
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The death cross seen in January 2008, ahead of the financial crisis, caused the blue chip gauge to plummet 30 percent over the next twelve months.
The same pattern was observed prior to the 1929 crash, before the three-year bear market of the 1930s, during which the S&P 500 fell 83.4 percent.
They also appeared in 1938 and again in 1974, one of the worst stock market plunges since the Great Depression.
But other death crosses were followed by a backlash. An example from March 2020 was followed by a 74.4 percent increase over the year.