S&P 500 is the Latest Coronavirus ‘Casualty’

The ‘death cross’ has struck again, demanding the next ‘casualty,’ the S&P 500.

Yesterday, the S&P 500’s 50-day SMA crossed below the 200-day SMA, commonly – and ominously – considered the ‘death cross.’

Something with such a dire name has got to be bearish, right?

There were 5 other S&P 500 death crosses in the last decade (red lines, chart below). None of them was particularly bearish. But, all of those happened during one of the greatest bull markets of all time.

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Let’s expand the look-back period to 50 years and apply the following two filters to get the most similar precedents:

  1. First crossover (50-day SMA below 200-day SMA) in at least 10 months
  2. Crossover preceded by a 5% decline over the prior 4 weeks

Here are the signals: 2/1984, 11/1987, 4/1994, 7/2010, 8/2011, 8/2015, 12/2018.

The chart below shows the performance of each signal 40 trading days before the crossover and 250 trading days (1 year) thereafter. 

Short-term, the performance was rocky, but long-term performance was solid:

  • 1 month later: S&P 500 down 5 of 7 times (average loss: 1.47%)
  • 2 month later: S&P 500 up 6 of 7 times (average gain: 2.29%)
  • 3 month later: S&P 500 up 7 of 7 times (average gain: 4.58)
  • 6 month later: S&P 500 up 6 of 7 times (average gain: 7.00%)
  • 12 month later: S&P 500 up 7 of 7 times (average gain: 16.06%)

The chart below shows the S&P 500 performance for the past 40 days and the average forward performance of the past 7 signals projected forward.

Based on the past 50 years of history, the death cross has not been a bearish signal. The caveat is that the 2020 stock market has already defied many historic patterns.

Some of those historic extremes along with the short-term S&P 500 forecast are available here.

Continued updates, projections, buy/sell recommendations are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

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VIX Analysis – The Misleading Message of the Golden Cross

Things aren’t always what they seem. That’s certainly true with the golden VIX cross. It sports an absolutely flawless record since 2008. However, digging deeper reveals the flaws of this seemingly flawless indicator.

Golden crosses or ominous death crosses tend to grab Wall Street’s attention. The CBOE Volatility Index or VIX just saw a golden cross.

A golden cross occurs when the 50-day simple moving average (SMA) crosses above the 200-day SMA (a death cross occurs when the 50-day SMA drops below the 200-day SMA).

A golden cross for stocks, indexes or ETFs is generally considered a bullish development. Since the VIX serves as a fear barometer (the higher the VIX, the more fear), a golden VIX cross is actually considered bearish for stocks.

The Bi-Polar VIX Golden Cross

Since 2008 a golden VIX cross has foreshadowed lower stock prices 100% of the time. As the chart illustrates, the 50-day VIX SMA crossed the 200-day SMA on 9-17-2008, 5-26-2010 and 7-26-2011.

One month later the S&P 500 traded lower every time. In 2008 and 2011 the S&P 500 losses easily reached double digits. Based on analysis going back to 2008 the golden VIX cross is a definite negative for stocks.

There were 24 golden VIX crosses from 1987 – 2007. Unfortunately, that’s too long of a time span to easily illustrate via a chart.

Nevertheless, a thorough examination of those 24 instances reveals no bearish implications for stocks. In fact, buying the VIX (or selling the S&P 500) based on the signals prior to 2008 would have racked up more losses than gains.

Such a poor track record is not surprising. After all the VIX is mean-reverting, so betting on the continuation of a trend suggested by a long-term moving average is counter intuitive.

While I don’t base my analysis on the VIX golden cross, the general behavior of the VIX, the S&P 500 and Treasuries may suggest that the nature of the market is changing and that lower lows are still ahead for stocks.

The June 18, Profit Radar Reported plainly recommended that: “We will go short with a move below S&P 1,635. We will also go short the Nasdaq-100 with a move below 2,970.”

>> click here to test drive the Profit Radar Report.