The flames of war between the U.S. and Iran are raging. Are the U.S. stocks not done falling yet? Research firms: Pay attention to three major "ominous signals"!

Ask AI · Why NDR’s Death Cross signal is effective for warning of a long-term bear market?

Caixin Global March 31 (Editor: Junzhi Huang) Since the U.S.-Iran conflict broke out, the S&P 500 Index has fallen by about 8%, with the decline exceeding the average 6.1% drop during previous geopolitical shocks. However, a series of indicators related to the S&P 500 Index still appears to be sending warnings to investors: the suffering brought by this war may not be over yet.

Research firm Ned Davis Research (hereinafter referred to as NDR) says that it has found that some trend indicators in the benchmark index are approaching or have already issued sell signals. This could indicate that the S&P 500 Index may fall further—even after the index has already dropped significantly since the outbreak of the U.S.-Iran war.

NDR research analyst London Stockton wrote in a report to clients on Monday: “Overall, the evidence from trends looks even more ominous. Most of our major models have already shifted to bearish.”

He specifically mentioned three “ominous signals,” suggesting that the market may fall further:

1. The S&P 500 Index is pulling back from a recent high

Since its January high, the S&P 500 Index has already fallen cumulatively by 9%. NDR says that based on its analysis of the index’s percentage pullbacks over the past 79 years, when the S&P 500 drops at least 7.2% from a recent high, historical data typically show this as a sell signal for investors.

The company added that this sell signal suggests investors should shift their investments from stocks in the benchmark index to commercial paper (that is, short-term corporate bonds).

When discussing this indicator, Stockton said: “It’s also prone to being affected by sudden, sharp market volatility, but when the market still has room to fall further, it’s a good stop-loss point.”

2. The S&P 500 Index is moving closer to a “Death Cross”

A “Death Cross” is a bearish technical signal for the S&P 500 Index. It occurs when the index’s 50-day moving average crosses downward through its 200-day moving average.

At present, the S&P 500 Index has not broken through this threshold yet. However, the S&P 500 Index’s 50-day moving average (around 6803 points on Monday) is approaching the 200-day moving average (around 6636 points).

When discussing the “Death Cross” signal, Stockton said: “Unless there is a sudden and rapid recovery, the likelihood of this happening soon is increasing.” However, he also noted that once such a signal appears, stocks often swing sharply and rebound quickly.

“But the reason we pay attention to this indicator is that it can deliver longer-term warnings, and it has been very effective for larger, longer-lasting bear markets (such as the bear markets in 2009 and 2022). A Death Cross indicates that investors are being more cautious about stocks,” he added.

3. Trading volume demand and supply trends are turning bearish

Stockton explained that the S&P 500 Index’s trading volume demand (buying side) is declining, while trading volume supply (selling side) is rising. This indicates that investors have more interest in selling the index than in buying it.

According to the firm’s analysis, the gap between trading volume demand and supply was about 1.25 last Friday. The report said that if this gap falls to below 0.8, it would mean that investors should sell stocks and buy Treasuries.

“It’s just a bit short of issuing a sell signal,” he added.

No coincidence there. Deutsche Bank also pointed out that during the U.S.-Iran conflict, the stock market’s performance appears to be different from previous geopolitical conflicts, and that U.S. equities still have significant room to fall. The bank’s strategists warned that investors are absorbing a painful lesson: buying the dip driven by geopolitical factors is not a sure thing.

Deutsche Bank research shows that after past geopolitical shocks, the S&P 500 Index typically takes 16 days to bottom and rebound. The average recovery time is 109 days, but this figure is heavily affected by the severe 1973 Arab oil embargo incident; after that event, the S&P 500 Index took more than five and a half years to get back on its feet.

And last Friday was the 20th trading day since the U.S.-Iran conflict broke out: although the war began on February 28, most investors did not have the opportunity to trade it until after the market reopened on March 2. Deutsche Bank noted that investors have clearly been underweight in stocks, and they still have room to further reduce stock exposure.

(Caixin Global: Junzhi Huang)