What exactly is a ‘death cross’ and should I care?
A so-called death cross is a charting signal that’s supposed to indicate: things are about to get worse. The cross occurs when a ‘fast’ moving average crosses down through a ‘slow’ moving average. Technical analysts often use a 50-day MA and a 200-day MA respectively. According to some websites these time-periods are part of the definition of a death cross.
Moving averages smooth out the day-to-day performance of a stock or index - removing the up and down spikes of the underlying data. This makes it easier to spot a trend, but we should remember that moving averages have lag - they are a look in the rear view mirror. We don’t use them blindly to steer the road ahead. Nevertheless, they do contain information that we may want to pay attention to.
The problem with moving average indicators is that if the averaging period is too short, then we get whipsaws and false signals. If the averaging period is too long, then by the time the signal happens the event we were looking for is already long gone. For long term investing, longer term averaging periods are more helpful, because there are fewer but probably more significant signals.
Looking at daily data, moving average periods of 200-day and 400-day are helpful to look for shifts in the longer term trend. However, daily data is too noisy for my taste, and I prefer monthly data - in which case I use a 10-month MA and a 20-month-MA. The chart above shows the S&P500 with these moving averages plotted. There was a death cross on 28-Feb-2001, 30-May-2008, and yesterday 26-Feb-2016.