Long-term investors in stocks need not worry about ‘Death Cross’

Around 70 per cent stocks of Nifty, such as TCS, L&T, Sun Pharma, ICICI Bank, have entered ‘ death cross’ — a terminology used by technical analysts, where the short-term moving average (50-day) drops below long-term moving average (200-day). Technical traders who track ‘death cross’ indicator interpret the trend as a bearish signal and expect stocks to remain under pressure in the near-term. Investors may, however, use the weakness to buy some of the stocks such as TCS, L&T and Sun Pharma among others in smaller quantities regularly.

"The structure of many marquee names in the index has broken. Hence, traders are expected to remain bearish in these counters for short-term, and stocks are likely to decline another 5 per cent from current levels," said Dharmesh Shah, head of technical at ICICI Securities.

Indian markets had witnessed ‘death cross’ in majority of index stocks in 2008 and 2011. Investors with long-term horizon who had invested during these periods made good money. Sensex after forming bottom March 2009 and December 2011 had doubled by January 2010 and March 2015.

The Infosys stock during its bear phase of 2007-08 dropped nearly 50 per cent, but later through 2009-10 the stock recovered more than 200 per cent. Similarly, the SBI stock during 2010-11 dropped over 50 per cent, but bounced back about 90 per cent during 2013-14. "The leading index stocks which have entered the ‘death cross’ are showing mixed signals as some are continuing to drift downwards, while some are showing signs of bottoming out," said Nagaraj Shetti, technical and derivative analysts at HDFC Securities.