S&P 500 Golden Cross: Bullish or Bearish?

The S&P closed above its 200 DMA on June 10th; a bullish sign we were told. On June 22nd it closed back below its 200 DMA, a bearish sign unto itself, but given more weight since the move above was then seen as failing. A “Golden Cross”, we have recently learned, occurs when the 50 DMA moves above the 200 DMA in any given price stream. This occurred in the SPX by a paper thin margin of 0.3216 S&P points on the 23rd and continued in the same direction yesterday.

In thinking about the positive, double negative, positive movement just described, an early routine by George Carlin came to mind as he describes a convoluted scenario whereby a Catholic misses Mass because he is on a ship that crosses the international date line while they are asleep and is then trying to determine whether they committed a mortal sin. “Would that there, then there, be a sin there, Fahtha?” was the punch line and it seem apropos in trying to determine whether this market is heading higher or lower.

So, are we in bull mode, bear mode or maybe just confused mode? CDS spreads at the index level turned lower again yesterday, usually an indication of higher stock prices, but more individual names in the CEC universe are showing widening spreads and declining stock prices than vice versa, albeit by only a 4.2% margin or 18 out of 428 names.

One thing that is not in dispute is the financial squeeze going on with the state of California and the states in general given the loss of tax revenue resulting from the current “Decession”.

Arnie’s budget was just rejected by voters in the Golden State and he is facing a $24.3BN deficit just six months after raising taxes to deal with a $40BN budget gap. His suggestions have run the gambit from cutbacks in education, Medicaid, prisons and pensions to the oft mentioned, much opined for Flat Tax.

More about the state of the State of California in a minute but should anyone need an example of what happens when you “tax the top 2%” they need only to look at the financial troubles on the Left Coast.

CDS spreads for CA peaked on 12/12/2008 at 456bps for 5 year protection, the low tick came on May 8th of this year at 213bps and they closed last night at 326bps down 6bps from the previous day which was the top tick for the move higher that started on 5/8.

California is not alone in this as the 50 kids that represent stars on the flag are not allowed to run deficits like their Uncle Sam. “There are so many issues that go way beyond the current downturn. This is an awful time for states fiscally, but they’re even more worried about 2011, 2012, 2013, 2014″ said Scott Pattison, executive director of the National Association of State Budget Officers recently. On a combined basis states face a gap of about $230BN for fiscal 2009-2011 which is more than double the $130BN they have access to through the federal stimulus package.

Additionally, growing their way out of the problem does not appear to be a quick fix as Donald J. Boyd, senior fellow at the Nelson A. Rockefeller Institute of Government at the State University of New York (three times fast please) says that it will take at least five years and probably more from when the recession began in December 2007 for states to grow tax receipts to pre-recession levels.

California appears to be the lightning rod in this situation and for many reasons the eyes of other Governors as well as those in D.C. and hopefully, the nations ordinary citizens will learn from the “Gubernator’s” experience.

Comments

[Mad Hedge F...:]

:ooks Bearish to me. Now that we are solidly into a correction, I have been flooded with requests from readers to call the next bottom in the S&P 500. Well here it is. Brace yourself. Put it on a Post-it-Note on your computer. It is without a doubt and unquestionably going to be 880, 850, 830, 800, 750, 666, or 320. That last number works out to be 90% of the book value of the S&P 500, which was the low seen in the 1930s depression. Yes, that depression, not this one. You are really asking me to solve a one billion variable equation, because that is the number of direct and indirect participants in global stock markets. If the few green shoots out there start to die off, the meltdown in commercial real estate accelerates, the Fed missteps by draining liquidity too soon, or there is another unforeseen shock to the system, then you can go with the lower of these numbers. If we are distracted by the health care debate, emerging market economies continue to perk up, and this strength helps our technology stocks stay alive, then sleepy narrow trading ranges will dominate, and the higher support levels will hold. But no matter what happens, I will be able to come back to you in three months and claim that I was right.

Jun 25 09:33 AM

[TradingHelp...:]

I am increasingly unsure re the direction of the next leg, nor am I making bets on a move. It's a full time job just counting the acts of insanity that got us into this mess.

Jun 25 11:33 AM

[Michael Clark:]

We're not in a real correction yet on the S&P 500, by my calculations. We have support at 878.94. If this holds, then we will attempt to take out resistance at 956.23. If we take out this resistance, then no correction at this point.

I am negative on the markets (and the S&P 500) from an intellectual and emotional viewpoint. I think it is desperation that is making investors (i.e., hedge fund directors, investment bankers, brokers, government officials, banks, etc.) throw their money at this rally. The fear is that a broken rally will throw many of these middle men right out of jobs. The desperation is to rekindle another bubble -- another stock bubble -- so that consumers will feel good about their economy, their leadership, their government, and start throwing money back into consumer purchases.

These people don't understand that the golden goose that laid the golden egg has been murdered by the boys over at Goldman Sachs -- the egg is gone, the goose is gone, and this market is coming down again, probably very hard.

But technically, the American markets are not in a correction yet, although European markets are. Asian markets are still the strongest of the three. It is strange that Asian markets are strongest. Asian markets never lead. Asian investors are very loyal and disciplined and believe that the West cannot be lying, will never be poor, and will turn things around somehow. Asian economies are even weaker that western economies in most ways. But Asian investors -- and the Western hedge funds that are beefing up the indexes -- are living is some kind of fantasy.

Jun 25 12:42 PM

[Walter J.:]

Right now, I think the consensus sentiment is that we are in a healthy pullback mode coming off a 40% S&P rally since the March 9 lows... That being said, We have been in a fairly tight range between 880-940 since the end of May. We reached resistance twice at around the 940 level unable to break through as the P/E ratio on the S&P reached its long term avg. around 16.

Currently, there is a lot of cash waiting on the side line waiting to get in whether it is private investors that pulled it out in panic at the end of '08 or mutal funds and institutions, we are going to see a bottom set in around 880- and it seems to be around 895 from this bounce. The investors that missed out on the 40% rally are kicking themselves but they must realize that we are still 25% down in the S&P since Sept '08 and the collapse of Lehman... This means significant upside potential is still there.

Now, I am not a firm believer of technical analysis although it does make up a portion of how I rank a stock and whether it appears attractive or over-valued. The 200 day & 50 day MA's have crossed setting up the question that has been tossed around since our relatively flat/negative move since June 12--- Where do we go from here & why? what will be the catalysts that push us up to the next leg of the rally or tear us down to retest the lows set in March...

I think with earnings season coming up, and Q2 coming to an end we will see a clearer picture of the direction the markets will be heading. As of now, I'm bullish and trading on a daily-weekly basis as ranges in current stocks have been relatively easy to spot (selling high&buying low)... Hopefully, this can prove to be right and we can find the next leg of the rally up to 1k in S&P.

Good luck to all

Jun 25 01:16 PM

[AndrewBaker:]

Well, I won't go into all the in and outs of the reasoning, but S&P 500 at 550 is my technical interpretation. There are four support points down to 750, then 700, then if we go lower not much to stop a fall down to 600. After that, 550 could just as easily be 500.

Commercial real estate and tax revenue losses are just two financial aspects not yet been properly considered along with so many other negatives. I don't want to be pessimistic - I have to be. Just look at reality and you will be too.

Jun 26 12:50 PM

[CLH:]

Does it really matter? Rally in bull or bear? Only fools care. The index went up nearly 50% while the dumb dumbs argued this question. Get on board and make some money. Isnt that what we are here for or is it to wonder how many angels on the head of a pin?

Jun 27 08:37 AM

[Northstar10000:]

Short the SPY going over 93. Keep it simple. Buy silver stocks in the Fall.

Jun 27 04:28 PM

[RiskAverseA...:]

This really is a no-brainer. The more developed commentaries on the Golden Cross are quick to point out the record of this indicator during recessionary periods. It is an incredibly reliable signal of bullish conditions looking out months forward.

HOWEVER, THERE'S JUST ONE PROBLEM WITH THIS ANALYSIS:

We are NOT in a recessionary period. Instead, we are in a state of outright collapse. Those who deny this probably are the same folks who scoffed in 2000 at those calling the "new era" in technology a bubble.

We are in a state of collapse. The stock market (and equity in general) presently is in its "rearranging the deck chairs" phase. Over the next couple years, the market likely will collapse. Equity is DEAD MONEY. Long live debt. (How many more bailouts do you need to see before this FACT sinks in?)

Of course, there's no such thing as a "sure thing." However the risk is clear. One might duly note, too, that, denial of this possibility is frightfully pervasive. This, itself, is a huge red flag signaling the risk averse alert investor to remain extraordinarily cautious toward equities...

Jul 02 11:30 AM

[BuyingLowSe...:]

Oh I only wish everyone had such a pessimistic opinion of equity. I will pray for the day when the news paper headlines read: "Equity is dead money".

You're obviously a debt investor, so do us equity investors a service and keep re-posting this over and over again, collect your coupons and continue to be outperformed.


On Jul 02 11:30 AM RiskAverseAlert wrote:

> This really is a no-brainer. The more developed commentaries on the
> Golden Cross are quick to point out the record of this indicator
> during recessionary periods. It is an incredibly reliable signal
> of bullish conditions looking out months forward.
>
> HOWEVER, THERE'S JUST ONE PROBLEM WITH THIS ANALYSIS:
>
> We are NOT in a recessionary period. Instead, we are in a state of
> outright collapse. Those who deny this probably are the same folks
> who scoffed in 2000 at those calling the "new era" in technology
> a bubble.
>
> We are in a state of collapse. The stock market (and equity in general)
> presently is in its "rearranging the deck chairs" phase. Over the
> next couple years, the market likely will collapse. Equity is DEAD
> MONEY. Long live debt. (How many more bailouts do you need to see
> before this FACT sinks in?)
>
> Of course, there's no such thing as a "sure thing." However the risk
> is clear. One might duly note, too, that, denial of this possibility
> is frightfully pervasive. This, itself, is a huge red flag signaling
> the risk averse alert investor to remain extraordinarily cautious
> toward equities...

Jul 02 03:29 PM