Technical analysts have long followed the so-called “Death Cross” as a leading indicator to predict a future market decline. The Death Cross occurs when the S&P 500’s 200 day moving average dips below its 50 day moving average. This occurred last Friday for the first time since 2011 and it begs the question of whether the Death Cross has been a good predictor of future market returns historically. The Irrelevant Investor blog (vis Barry Ritholtz) has an excellent analysis of all the Death Cross occurrences in the last 50 years and what happened following each one.
For the most part, the data does not show a strong correlation between occurrences of the Death Cross and future market declines. The average one-year market return following each occurrence is about half the market average one year return, so there may be some predictive value, but like most market indicators, the dispersion of outcomes is very wide, with the best one year return for the indicator being a 39% decline in the market and the worst being a 30% gain.
Head over to The Irrelevant Investor to see the full historical return chart.