Dark Omen Threatens Stock-Market Bulls

By KELLY EVANS

The stock market hasn't been kind to bulls lately. And the mauling may be set to only get worse.

That at least is the warning from some technical indicators, those chart-based omens that analysts examine to divine the market's direction. The S&P 500-stock index, in particular, is in danger of tripping over a talisman that has boded ill in the past. The index's 15% selloff since late April looks set to push the market's 50-day moving average below its 200-day moving average, in what is known as a "death cross."

As the label suggests, this tends to be a bearish signal. Its opposite is known as a "golden cross," which is a bullish sign. The last death cross formed in late December 2007; the S&P 500 went on to lose more than half of its value.

Such a death cross has also marked every other bear market since 1972, notes Ed Yardeni, president of Yardeni Research. And the market's 50-day average is currently less than 1% above this tipping point.

The trouble with such technical patterns and formations, which are often derided as a form of hocus-pocus by investors more focused on fundamentals, is that they tend to be a bit of a self-fulfilling prophecy. This is especially the case given how many people in markets watch them.

So as the market sells off, short-term averages by definition will fall more quickly than longer-term ones. The bearish signals that result then reinforce the downward trend. In other words, the danger of a death cross is that it puts further pressure on already eroding investor sentiment.

The cross itself isn't always a surefire sell signal. There have been nearly two dozen death crosses over the past four decades, notes Brockhouse Cooper strategist Pierre Lapointe. The S&P 500 has declined by 0.4% on average one month after such a formation. After six months, on the other hand, the market on average had gained nearly 5%.

But that may be cold comfort if stocks' sharp rebound since early 2009 was a classic bear-market rally. If so, the current selloff is more likely the start of a longer period of weakness, says Andrew Chevariat a technical analyst at BNP Paribas.

Whether or not such signals are a guide to the future, they do affect sentiment. And this severe technical weakness is the last thing the market needs heading into Friday's vital jobs report.