A death cross is the X-shape created when a stock’s or index’s short-term moving average descends below the long-term moving average, possibly signaling a sell-off.
The death cross typically shows up on a technical chart when the 50-day simple moving average (SMA) of a stock or index peaks, drops, and then crosses below the 200-day moving average. Because the 50-day SMA is more of a short-term indicator, it’s considered to be a more accurate indicator of potential volatility ahead than the 200-day SMA, which has averaged in 200 days worth of prices.
That said, both the 50-day moving average and the 200-day are, by definition, lagging indicators. Meaning: They only capture what has already happened. Still, some death crosses have appeared to forecast major recessions — although they can also send false signals.
Related: What is a safe investment?
What is a death cross, exactly?
A death cross is based on a technical analysis of a security’s price. The short-term average dropping below the long-term average to create an X-shape is the “cross”; the “death” part of the name refers to the ominous signal that such a crossing may send for individual securities, overall markets and even assets like cryptocurrencies.
A death cross tends to form over the course of three separate phases. In the first phase, the rising value of a security reaches its peak as the momentum dies down, and sellers begin to outnumber buyers. That brings on the second phase, in which the price of the security begins to decline to the point where the actual death cross occurs. That’s typically marked as being when the security’s 50-day moving average dips under the 200-day moving average.
That crossing alerts the broader market to a potential bearish, long-term trend, which brings about the third and final phase of the death cross. In this phase, the stock may continue to lose value over a longer period.
If the dip following the cross is short-lived, and the stock’s short-term moving average moves back up over its long-term moving average, then the death cross is usually considered to be a false signal.
What does the death cross tell investors?
The death cross has helped predict some of some of the worst bear markets of the past 100 years: e.g., in 1929, 1938, 1974 and 2008. Nonetheless, because it’s a lagging indicator, meaning that it only reveals a stock’s past performance, it’s not 100% reliable.
Another criticism of the death cross is that the pattern sometimes won’t show up until a security’s price has fallen well below its peak. In order to alter a death cross calculation to see the downtrend a little sooner, some investors say that a death cross occurs when the security’s trading price (not its short-term moving average), falls under its 200-day moving average.
For experienced traders, investors, and analysts, a death cross pattern for a stock is most meaningful when combined with, and confirmed by, other technical indicators.
When interpreting the seriousness of a death cross, experienced investors will often look at a stock’s trading volume. Higher trading volumes during a death cross tend to reveal that more investors are selling into the death cross, and thus buying into the downward trend of the stock.
Investors will also look to technical momentum indicators to see how seriously to take a death cross. One of the most popular of these is the moving average convergence divergence (MACD), which is based on the moving averages of 15, 20, 30, 50, 100, and 200 days, and is designed to give investors a clearer idea of where a stock is trading than one that’s updated second by second.
Death cross vs golden cross: Main differences
The opposite of a death cross is known as a golden cross. The golden cross indicator is when the 50-day moving average of a particular security moves higher than its 200-day moving average.
While the golden cross is broadly considered a signal of a bull market, it has some of the same characteristics as the death cross in that it’s essentially a lagging indicator. Experienced investors use the golden cross in conjunction with other technical indicators such as trading volume and MACD.
What did a death cross signal for Bitcoin?
Death crosses have primarily been used by investors as a way to understand the trading trends of stocks. But as a technical indicator, they can be used to understand the trading trends of any investment, including cryptocurrencies like Bitcoin.
In June of 2021, the value of Bitcoin underwent a death cross, when its 50-day moving average plummeted under its 200-day moving average. At the time of the death cross, it was trading at just under $32,000, and would fall to just under $31,000 a month later, almost half of its April peak value of more than $63,000.
Bitcoin then rebounded to more than $66,000 as of October 20, 2021.
Given the extreme volatility in Bitcoin and other forms of cryptocurrency, this could be seen as an example that the usefulness of the death cross may be limited. Being a lagging indicator of a security with significant price volatility may mean that by the time an investor sees it as a warning, it’s too late.
Is a death cross a reliable indicator?
Historically, the death cross indicator has an impressive track record as a barometer of the broader stock market, especially when it comes to severe downturns, as noted above.
The Dow Jones Industrial Average (DJIA) went through a death cross shortly before the crash of 1929. More recently, the S&P 500 Index underwent a death cross in May of 2008 – four months before the 2008 crash. In both instances, investors who stayed in the market faced extreme losses.
But the Dow also went through a death cross more recently in March of 2020. And the markets quickly rebounded, and rose to new heights.
The fact is that broad-market death crosses happen frequently. Before the COVID-19-related downturn, the Dow has gone through five death crosses since 2010, and 46 death crosses since 1950. Yet the index has only entered a bear market 11 times since the 1950s. A death cross doesn’t necessarily bring significant losses, either.
Even more noteworthy is that the Dow continued falling after a death cross only 52% of the time since 1950. And when it did keep falling, its median decline after a month was only 0.9%.
For short-term traders, the death cross has less value than it does for investors with longer-term outlooks. As an indicator, the death cross – especially one that’s market wide – can be especially valuable for long-term investors who hope to lock in their gains before a bear market begins.
How to trade a death cross
The death cross is a significant indicator for some investors. But it’s important to remember that it only shows past trends. As an investor, its equally important to use the death cross in conjunction with other indicators such as the MACD and trading volume, as well as other news and information related to the security you’re investing in.
The takeaway
Although the ominous-sounding death cross stock pattern is valued by some analysts and investors as a way to foretell a downturn in a certain security or even the broader market, it’s really not that reliable. The main elements of the death cross — a stock’s short-term moving average and long-term moving average — are lagging indicators that may or may not predict a bearish turn of events. No matter what different market indicators portend, ultimately it’s up to you to make the best investing choices.
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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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Popular monthly dividend stocks
You might not guess it from the way many investors base their mood on the day-to-day movements of the stock market, but for most people, an investment account represents money that’s being put away for the long term.
It isn’t like a bank account with money regularly going in and out. The profits and losses those investors see on their statements, especially younger savers, won’t be realized until they actually sell their holdings. And that could be years or even decades down the road.
For those who are looking for money right now, however, there is a way to generate income from a stock portfolio on a more predictable basis, even if you’re just starting out. And that’s by investing in stocks that pay a dividend.
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A dividend is a portion of a company’s profits that’s paid to its investors as directed by the board of directors. Dividends usually are paid quarterly, but they also may be distributed monthly or yearly.
Most dividends are cash payments made on a per-share basis. For example, if the company pays a dividend of 30 cents per share, an investor with 100 shares of stock would receive $30.
The dividend rate is the total expected payments for the year, plus any non-recurring payments the investor might receive during that same period. If the investor receives $30 monthly, the dividend rate is $360.
Why would a company make dividend payments? It’s often a sign that the company’s growth has begun to slow. Instead of reinvesting in itself, the company may decide to share its profits in an effort to keep stockholders from moving on to something else.
It’s a normal part of the business cycle, and it’s generally thought of as a positive sign when a company is stable enough to offer its investors reliable dividend payments.
Dividends aren’t guaranteed, though; a company can skip or stop making payments at any time. That’s pretty rare, however, which is why so many older investors make dividend payments part of their retirement plan. They look at it as a dependable way to replace some of their income when their regular paychecks go away.
Younger investors also might use their dividends to help pay the bills or to save for a big vacation or some other hefty purchase. But those who don’t need the income may choose to reinvest the money with the idea of boosting portfolio growth.
The more dividends they reinvest in the stock, the more shares they can own. And the more shares they own, the larger their future dividends could be.
No matter what the purpose behind the purchase might be, it’s usually a slow and steady process compared to investing in growth stocks. Growth stocks rarely pay dividends because the profits are reinvested in the company. Still, investors should take care when picking dividend-paying stocks.
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So, what should an investor look for in dividend-paying stocks? That’s a tricky question. Did we mention that there are no guarantees and all investing comes with risk?
Even with help from a financial professional, investors may want to look at several criteria before moving forward.
Here are a few things investors can consider when looking for the best dividend stocks.
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Investors often go by a stock’s “dividend yield” to determine its potential. Yield is presented as a percentage (annual dividends per share divided by price per share) that represents the return per dollar invested that a shareholder receives in dividends.
Stocks that offer the highest yields may appear to be the most promising, but that number can be misleading. The dividend yield could be rising because the share price is falling — and that can be a sign that a company is struggling. So, yield is an important factor to follow, but it shouldn’t necessarily be the only one.
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Another number to look for is the dividend payout ratio (annual dividends per share divided by earnings per share). This percentage can help determine if the dividend payments a company is making make sense in the context of its earnings.
Again, a high ratio is good, but an extremely high ratio can be difficult to sustain. If a stock is of interest, it may help to check out the company’s payout ratios over an extended period.
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Investors also may wish to focus on stable, well-run companies that have a reputation for paying consistent or rising dividends for years.
To be considered a “dividend aristocrat,” a company must have paid its dividends for at least 25 years with a steady increase each year.
Think about the products people use every day and the businesses that are expected to be around for a long, long time: popular fast-food restaurants and snack brands, soft drink companies, well-known big box stores and utility companies.
Keep in mind a company’s future prospects, not just its past success, when shopping for high-dividend stocks.
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For those who are drawn to the growth potential made possible through reinvesting, timing also may be a factor.
Stocks that pay monthly dividends are less common, but they can make it possible to purchase additional shares more quickly. (They also can help those who use their dividends for income to get their bills paid on time every month.)
Real estate investment trusts (REITs), many of which distribute dividends monthly, are a popular choice for those who want consistent payments.
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A “qualified dividend” is a type of dividend that qualifies for a favorable or a lower tax treatment. A “non-qualified dividend” doesn’t get that lower tax preference and is taxed at an individual’s normal tax rate.
Investors will receive a Form DIV-1099 when $10 or more in dividend income is paid out during the year. If the dividends are in a tax-advantaged account (an IRA, 401(k), etc.), the money will grow tax-free until it’s withdrawn.
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We’ve discussed two of the biggest pros to investing in dividend stocks: passive income (income that requires little to no effort to earn and maintain) and reinvestment (using dividend payments to buy more stocks or to get into other investment options).
Another plus for those who choose solid dividend stocks is that they likely will receive payments from those investments even if the market takes a dip or dive.
That can help insulate investors during tough economic times. It might keep those who are making regular or occasional withdrawals from their stock portfolio from having to sell at a low to get the money they need.
It also may allow investors who don’t need the income to buy stocks at a lower price while the market is down. Stock in a mature, healthy company also may be less vulnerable to market fluctuations than a start-up or growth stock.
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But no investment strategy is perfect, and there are some disadvantages to dividend stocks. Dividends are not obligations, and a company can decide to cut its dividends at any time. It could be that the company is truly in trouble or that it simply needs the money for a new project or acquisition.
Either way, if the public sees the cut as a negative sign, the share price could fall significantly. And if that happens, an investor could suffer a double loss.
Then there’s the matter of double taxation. First, the company must pay taxes on its earnings. Then the shareholder must pay taxes again as an individual.
Finally, choosing the right dividend stock can be tricky. As noted above, the metrics are quite different than they are for selecting a growth stock.
This isn’t about finding the next big thing—but you don’t want the big thing that’s nearly over. While perusing the possibilities it may help to remember that what enables a company to stay healthy typically keeps its dividends healthy, too.
Dividend-paying stocks can be used to grow and diversify your portfolio and to help shield your savings in a downturn. But they aren’t foolproof.
Like any stock, they can be subject to company-specific, sector-specific and general market risks. And as with any stock purchase, it’s important to consider the big picture before making the investment.
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This article
originally appeared on SoFi.com and was
syndicated by MediaFeed.org.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
SoFi Invest
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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