- A ‘Death Cross’ appeared on Dow Jones Industrial Average on Monday
- The ominous sign is often an indicator of a downturn in the market
- The pattern has appeared before major crashes including 1929, 1938, 1974 and 2008
An ominous ‘death cross’ has spooked traders and sparked fears the stock market could be headed for a major drop despite positive movement in the market.
The worrying sign, which has appeared before several major crashes including 2008 and 1929, is generally taken as an indicator the market is heading for a downturn.
The last time it appeared was March 2022, when the markets plunged a massive 12 percent over six months.
The grim chart pattern occurs when the shorter-term moving average of a security (usually 50 days) falls below a longer-term one (200 days) and typically indicates the point where a short-term dip becomes a longer-term downward trend.
It was noted on the Dow Jones Industrial Average on Monday, the day before the markets saw their strongest performance since April, hitting their highest close since September 14.
The Dow Jones index has jumped 4.44 percent in six months, while the S&P 500 soared 8.69 percent following the news the annual rate of inflation fell slightly to 3.2 percent.
Investors are hopeful the cooling of consumer prices signals an end to the Federal Reserve‘s aggressive interest rates hike that currently sits at a 22-year high of between 5.25 and 5.5 percent.
However, the appearance of the ‘death cross’ has worried experts since it typically signifies a change in the market from bullish to bearish.
A bear market is when stocks experience a period of prolonged decline, encouraging sales.
Strategist David Rosenberg, president of Rosenberg Research, warned last month the Dow Jones was ‘at serious risk now of experiencing the uber-bearish “Death Cross.”‘
Analysts also pointed out a ‘death cross’ has appeared before many major historic downturns.
The death cross seen in January 2008 ahead of the financial crisis saw the blue chip gauge plummet by 30 percent over the next 12 months.
The same pattern was noted ahead of the 1929 crash before the three year bear market of the 1930s, which saw the S&P slump 83.4 percent.
They also appeared in 1938 and again in 1974, one of the worst stock market dives since the Great Depression.
Investors Jim Rogers and David Einhorn have both warned of a looming recession, Business Insider reports.
‘It’s a tricky time and we remain worried about the direction of the market,’ Einhorn said.
However, ‘death crosses’ have appeared when the market has just undergone a correction, according to Seeking Alpha.
The death cross seen in March 2020, for example, was followed by a 74.4 percent bounce over the year.
Many experts believe death crosses can also signify a good time to buy a security, as investors purchase assets while the price is low with the expectation the value will spike in future.