The Dow Jones has seen a dreaded 'death cross.' Here's what it means.

US stocks are on track for their best month since June amid expectations the Federal Reserve may have reached the end of its interest-rate increases at a time when the economy remains resilient and inflation has moderated. But not everyone is convinced by that optimistic narrative, with elite investors, including Jim Rogers and David Einhorn, recently warning of an oncoming recession and its potential impact on equities.


That argument may be getting some support now from an ominous pattern appearing on a key stock-market chart. The Dow Jones Industrial Average has just seen a "death cross" — a technical pattern where a shorter-term moving average (typically 50-day) drops below a longer-term one (200-day). The formation is regarded by many experts as a bearish signal — the Corporate Finance Institute defines it as "a chart pattern that indicates the transition from a bull market to a bear market."


The death cross "is understood to signal a decisive downturn in a market," Investopedia says. The last time the Dow witnessed a similar pattern was in March 2022, after which the index declined by about 12% over the next six months. "The appearance of a death cross indicates a decline in short-term momentum and a trend toward lower prices. That trend can last up to one year, but it is not necessarily bad news since lower prices provide the opportunity to buy at discounted prices," Seeking Alpha says.


The financial news and analysis provider also says the pattern has preceded most bear markets over the past 100 years or so — including 1929, 1938, 1974, and 2008. But death crosses have appeared even when the market had just undergone a correction, it adds. The Dow Jones is up 3.9% in November after falling in each of the previous three months. The S&P 500 index has climbed 5.2% this month, taking its year-to-date gains to almost 15%.

06 November, 2023

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