The stock market has been rattled this year, with the S&P 500 falling 10% year-to-date as investors worry about the economic fallout from President Donald Trump’s tariffs.
Those worries were compounded earlier this week when the S&P 500 and Nasdaq 100 flashed a “death cross” signal, which has historically been considered a bearish technical “sell” indicator.
But Adam Turnquist, chief technical strategist at LPL Financial, told BI this week that investors shouldn’t be too freaked out.
That’s because the historical returns following past death cross signals in the stock market have actually been pretty positive.
Turnquist crunched the numbers and found that since 1950, the 3-, 6-, and 12-month average forward returns for the S&P 500 after a death cross signal flashed were positive.
LPL Research
In addition, all three time horizons had a positive percentage rate of over 50%, with a 72% win rate 12 months after the signal.
Turnquist does still admit that the death cross can be an accurate signal of losses ahead, citing a handful of examples.
“While death crosses indicate recent price action is losing momentum and can serve as a prescient warning sign for developing downside risk, as was the case in March ’22, early December ’18, December ’07, and Oct ’00, the name is not as ominous as it may sound,” Turnquist said.
Returns after waterfall declines
Turnquist took his analysis even further by isolating death cross signals that occurred during past “waterfall” declines in the stock market, similar to the historic sell-off seen earlier this month.
“When you have a death cross with a pretty severe drawdown, you tend to get much better forward returns, meaning you’ve already priced in a lot of the damage,” Turnquist said.
Turnquist said that death crosses that occur within one month of a 15% drawdown in the S&P 500 have resulted in a 12-month forward average return of 16%, and a win rate of 83%.
The S&P 500 saw an as-much-as-21% decline from highs during the recent sell-off, which — based on Turnquist’s linear regression analysis — should precede to a 32% return in the next 12 months.
Turnquist said that’s “not necessarily our call.” But it suggests that the stock market could be primed for a big rebound based on the historical price action of death crosses.
Is the bottom in?
Turnquist thinks so, based on a slew of data points suggesting that stock market sellers are exhausted.
“We think there’s enough technical evidence to suggest that we’ve had the capitulation point in equity markets,” Turnquist said, highlighting negative investor sentiment and oversold conditions.
The question is, what will the shape of the bottom be?
Could we see a “V-shaped recovery” similar to what happened in March 2020, or a more drawn-out bottom that could see the market retest its lows?
Turnquist is leaning toward the latter more than the former.
“What we’re looking for to identify how sustainable is this rally off the lows, are we going to retest, it’s really leadership,” Turnquist said. “Are we gonna have this risk on rotation? We have not seen that, so that gives me a little bit of pause.”
Turnquist would be encouraged if a breadth thrust happens, and soon. That occurs when an overwhelming majority of stocks rally together, typically over 90% of listed stocks.
“That is underwhelming right now,” Turnquist said. “Not saying we have to go retest the lows, but I think this is gonna be more of a process.”
