The Nasdaq Composite Index recently fell into what is forebodingly called a “death cross” after plummeting 16% since reaching a record high last November, reports an article in Bloomberg. The “death cross” technical formation happens when an index’s 50-day moving average shifts below its 200-day moving average, and has sometimes indicated that more weakness is on its way.
For example, the death cross appeared in June 2000—just ahead of the dot-com bust—and then again in January 2008, right before the global financial meltdown, the article explains. And it’s usually a lagging indicator, appearing after the shift has already happened in stocks, like when it showed up in April 2020, when the bottom was actually in March. But while the term death cross is certainly ominous, it doesn’t always spell disaster. However, analysts say that with its appearance it is more likely that a downtrend could go on for a more extended period of time.
As inflation surges and the Fed positions to sharply tighten policy, it’s little wonder that volatility has hit the Nasdaq, as it is filled with rate-sensitive tech, Internet and growth stocks whose high valuations are targeted as borrowing costs rise. But that could also produce an opportunity for longer-term investors to buy as stock prices get cheaper.
In the last 50 years, there have been 31 death crosses for the Nasdaq. 71% of the time, the index rose for the following 21 days after the cross, and six months after that it was up 77% of the time, the article details. So while the formation has preceded significant drawdowns in the past, there wasn’t always a big decline afterwards. With investors still worried about market breadth, Wall Street experts are advising managing risk, whether or not the market stays above or falls below the January lows.