Death Cross

A Death Cross is a chart pattern used in technical analysis that signals a potential major downturn in a stock, index, or other asset. It occurs when a shorter-term moving average crosses below a longer-term moving average. While various timeframes can be used, the most widely watched combination involves the 50-day simple moving average (SMA) falling below the 200-day simple moving average (SMA). This event is interpreted by many traders as the definitive start of a long-term downtrend, or a bear market. The name, while dramatic, simply reflects the ominous outlook for prices in the near future. The opposite of a Death Cross is a Golden Cross, which signals a potential bull market. For value investors, however, the Death Cross is not a panic button but rather a piece of information to be considered within a much broader context of a company's underlying worth.

Imagine you're tracking a stock's journey. You could look at its price every single day, but that can be a chaotic, up-and-down mess. A moving average smooths out this chaos by creating a single flowing line representing the average price over a specific period.

The Death Cross uses two such lines to tell a story about market momentum:

• The 50-day SMA: This line represents the average closing price over the last 50 trading days (about two months). It reflects the short-to-medium-term price trend.
• The 200-day SMA: This line represents the average closing price over the last 200 trading days (about nine months). It reflects the long-term price trend.

When the faster-moving 50-day line (short-term sentiment) dives below the slower-moving 200-day line (long-term sentiment), it suggests that recent price weakness is not just a blip but could be turning into a sustained decline. It’s important to remember that this is a lagging indicator. The cross confirms a downtrend that has already been underway for some time; it doesn't predict it out of thin air.

In a word: No. While the term sounds terrifying, reacting to a Death Cross by immediately selling your holdings is often a costly mistake. For a value investor, price charts are, at best, a footnote to the real story of a business.

The Death Cross is a product of technical analysis, which studies price charts and trading volumes to forecast future price movements. Value investing, the philosophy of this dictionary, is built on fundamental analysis. We don't ask what the chart is doing; we ask what the business is doing.

• Is the company still profitable?
• Is its debt manageable?
• Does it have a durable competitive advantage?
• Is it trading for less than its intrinsic value?

If you own a wonderful business that you bought at a fair price, a scary-looking pattern on a chart shouldn't change your conviction. The market is often moody and irrational, but the value of a great company is far more stable.

History is littered with false alarms from Death Crosses. A market or stock can trigger the signal, causing panic-selling, only to reverse course and rally higher. This is known as a whipsaw, and it can brutally punish investors who react to technical signals without considering the fundamentals. For example, the S&P 500 experienced a Death Cross in March 2020 at the start of the COVID-19 panic, but investors who sold then missed one of the fastest market recoveries in history.

Instead of viewing a Death Cross as a reason to sell, a savvy value investor sees it as a call to do homework. Widespread fear, often amplified by signals like this, can push the stock prices of excellent companies down to bargain levels. A Death Cross can be a sign that it's time to:

• Go Shopping: Market pessimism is a value investor's best friend. A Death Cross confirms that fear is present, creating potential buying opportunities.
• Check Your Wishlist: Is there a fantastic company you've been waiting to buy, but the price was always too high? A market downturn might be the moment its price falls below its intrinsic value, offering a healthy margin of safety.
• Re-evaluate, Don't React: Look at your existing holdings. Has anything fundamentally changed about the businesses you own? If the answer is no, then the falling price is just noise. If you still have confidence in the long-term value, a lower price might even be an opportunity to buy more.