The word to describe the stock market in the past few months is nothing short of "carnage." The S&P 500 is now down 12% for the year, and the benchmark has recently produced a technically awful "death cross" as the 50-day moving average crosses below the 200-day moving average. In traders' perspectives, this means upside momentum is no longer in the market (duh), and short-term selling pressure exceeds long-term uptrend support. This "death cross" has not been seen since March 2020, coupled with a 35% peak-to-trough decline induced by the Covid pandemic. 

Going Back In History

The chart below zooms into the March 2020 period. What we can learn about this death-cross event is that the price does not have to go lower after the event occurs. As can be seen, the price had bottomed around the same time as when the death cross occurred. If you want to be positive about this current sell-off, you may wish that we're already at the bottom.

However, it is possible that the death cross is just the start of another bloody period for investors. If you do think there is more downside, this March 2020 period is not helpful in determining how much more downside. 

Before the pandemic, an death-cross event also occurred at the end of 2018, when investors were fearful about a very hawkish Federal Reserve that was about to do lock-step rate hikes and quantitative tightening, coupled with the US - China trade wars, all were perceived to almost certainly send the world's economy into a recession. At the end of September 2018, the S&P500 saw a sharp 10% decline in a few weeks. It then consolidated at the lows for about 2 months. The death cross occurred on about the beginning of December 2018, after that, the S&P 500 plummeted another ~10%, before it bottomed at the end of December 2018.   

When 2019 started, the S&P 500 quickly recovered to the former high after a 20% decline during the end of 2018. The U.S. economy certainly did not hit a recession, with GDP growth positive 2.2% in 2019 (slightly down from 3% in 2018).

What Is Likely To Happen Now?

Our view is that there may be more downside to the stock market, and in the next segment, we will discuss our thoughts on how come. But what we want to communicate is, ultimately there will be light at the end of the tunnel for companies that make things and sell them at a profit. Historically, the S&P 500 tends to post impressive gains in the 12-month period following an initial close in a death cross. Based on the 53 times the index has closed in death-cross territory, the average gain over that span is 6.3%, according to Dow Jones Market Data. To be sure, the index can remain in a death cross for some time; the average period is 155 trading days. 

Apple (AAPL), Who Had Been The Last Man Standing, Is Now Down

Apple (AAPL) had been the star of the market. This nearly $2.5 trillion in market cap company, which represents 6.2% of the S&P 500, has only fallen 18% from its all-time high, a relatively low number compared to other mega-cap tech companies such as Microsoft ($2 trillion, 22% off from ATH), Amazon ($1.5 trillion, 25% off from ATH), Facebook ($0.5 trillion, 51% off from ATH), NVIDIA ($0.5 trillion, 38% off from ATH). 

What's more important is that while the S&P500 and those other mega-cap tech companies have lost their key technical support of the 200-day moving average, Apple had been trading above its 200-day moving average. We believe that's the reason why the S&P 500 has not been down further, because investors can still find Apple to be a safe heaven.

However, as of yesterday's close, Apple closed below its 200-day moving average (bad). Usually when this occurs, if the stock cannot re-gain this technical support within a couple of days, a massive sell-off will follow. And remember, with Apple being the safe heaven for the ugly stock market in recent weeks, when this one falls, the broader market will fall even harder. 

Bottom Line

We don't want to associate ourselves with any sort of market call, if and how much more the S&P 500 will go lower. At the end of the day, the stock market is a forward-predicting mechanism, and it's all about how much investors are willing to pay for a given set of economic outlooks. Pretty much all economic outlooks from market participants are pointing to a recession next year, so that's not particularly new for the market. The market has been selling off to price in a recession next year, and at some point, the recession risk becomes fully reflected in the stock market. As long as corporate earnings are still growing, stocks will resume rising. Once again, that's why we do the work of picking individual stocks. As far as we're concerned, our portfolio companies are still growing their profits.