Why The S&P 500 Death Cross Isn't That Bad

In a recent report, Bank of America Merrill Lynch research analysts Stephen Suttmeier and Jue Xiong took a look at the current state of the markets.

Nikkei 225

The firm remains a secular bull on Japan, noting that Nikkei 225 index rallied abruptly overnight “after holding the secular bull market breakout point and the uptrend line from late 2012 between 18,200 and 17,365.”

In addition, the index “already retested/undercut the late August low. Holding 18,200-17,365 makes the case for a bullish retest of the secular breakout and the potential for more upside,” the experts assured.

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The DAX

The German DAX maintained the uptrend support from 2011. However, the surge off the August 24 action is getting close to key Fibonacci and chart resistance around the 10,500–10,570 to 10,860 areas.

Additional resistance at 10,937 and 11011 is provided by the 50-day and 200-day moving averages, respectively. The downtrend line from April stands at 11,475.

Should the DAX sustain Wednesday’s “push above the 8/27 peak at 10,383, measured moves come in at 10,973 and 11,415. Stalling below these resistances and/or failing to meet these measured moves would favor a drop back to support near 10,000-9928, where a break would set the stage for a retest of the 9338 low,” the note expounded.

The SX5E

The EURO STOXX 50 (SX5E) index “undercut uptrend support from 2012 but the rally off the August 24 spike is testing chart resistance at 3291-3374.” Once again, additional resistance at 3459 and 3471 is provided by the 50-day and 200-day moving averages, respectively. The downtrend line from April stands at 3645.

“Should the SX5E sustain Wednesday’s push above the 8/27 peak at 3301, measured moves come in at 3487 and 3619. Stalling below these resistances and/or failing to meet these measured moves would favor a drop back to support near 3160, where a break would set the stage for a retest of the 2973 low,” the report explicated.

The S&P 500 Death Cross

Finally, the analysts look into the S&P 500, which signaled on August 28 “its 45th Death Cross of the 50-day moving average below the 200-day moving average going back to 1929.”

However, the analysts noted, performance data suggest that “the Death Cross is not as scary as it sounds.”

“The S&P 500 is up less often than average 3, 6, and 12 months after a Death Cross but does not have average negative returns for any of these periods,” Suttmeier and Xiong continued. “The S&P 500 has above average 3-month returns of 2.57 percent after a Death Cross, but below average 6 and 12 month returns of 3.53 percent and 3.44 percent, respectively, after the signal. This compares to average 3, 6 and 12-month returns going back to 1929 of 1.82 percent, 3.66 percent and 7.60 percent, respectively.”