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Founder & CEO of Johnson Research Group LLC, an independent provider of market, ETF and stock and options research. Our company's unique brand of analysis, dubbed Behavioral Valuation, combines technical analysis with various sentiment indicators (some proprietary) to provide relative... More
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  • A Golden Opportunity for the Markets
    The S&P 500 finished the year stronger than many expected it might as investors took opportunities to buy some groups of stocks “on the dips”. For the most part, the strength in the market has been constrained to certain sectors like the Consumer Staples, Utilities and Retail, with other more traditionally leading sectors like Technology and Financial stocks bringing up the rear. The net effect of the pick-and-choose buying that we’ve seen has still managed to lift the general market (S&P 500) higher, putting it in a potentially bullish technical pattern that has some strong implications as the New Year trading gets rolling.
    Technicians refer to it as the Golden Cross. Yes it’s very ominous sounding, but that’s for a reason. A Golden Cross is a technical pattern that occurs when a stock or index’s 50-day moving average crosses above its respective 200-day moving average. The cross of a short-term moving average above a long-term moving average quantifies the improvement in the trend of the underlying price. The implications are simple, if the short-term trend is improving then it stands to reason that the long-term trend is likely to do the same moving forward. 
    The Golden Cross is a rare pattern that has only formed on the S&P 500 21 times since 1970. To put that into perspective, that’s 21 instances over 10,600 days of trading, so the market’s tendencies after such an occurrence should be of interest to all investors, especially since it appears that we should see another cross in relatively short order.
    As of this week, the S&P 500’s 50-day moving average is sitting just below 1,240 while its 200-day moving average lies just below 1,260 (chart below). Given the current trends, I expect that we are likely to see a Golden Cross of the S&P 500 within the next three trading weeks, meaning that a window of opportunity remains open.

    Historically, performance of the S&P 500 after a Golden Cross is positive, as the premise of the pattern would suggest.  For our purposes, I’ve tested the historical performance for all occurrences dating back to 1970 (21).  The market’s performance is generally strong after the conclusion of the Golden Cross as the S&P 500 more than doubles the normal returns for all periods that were tested.

    Results For 1970 to current

    On average, the S&P 500 moved 1.3% higher one month after each Golden Cross compared to its average one-month return of 0.5%.  Looking out even further, the S&P 500 averages a return of 6.9% for the six months following these patterns compared to an average historical performance of 3.2%

    Results For 1990 to current

    Acknowledging the fact that the markets tend to trade with more sensitivity to technical analysis techniques over the last twenty years (as more investors and traders utilize this method of analysis in modern trading), we parsed the post-1990 signals out of our testing results to see if the implications are consistent.


    As expected, the results improved when considering the shorter look back period.  The table above displays the return results for the S&P 500 Golden Crosses since January 1990 (10).  In general, returns were similar to the farther back testing to 1990, however there was an improvement to the test that should be noted.

    The Winning Percentage of the more recent signals improved, suggesting that the Golden Cross has become a more reliable indicator.  This supports that idea that more investors are using technical analysis, and thus, more investors buying when these patterns form.  For the signals from 1990 to current, the S&P finished higher after six months of trade 90% of the time.  On average, the S&P 500 has been higher 70% of the time after six months trading for the same time period.

    Finally, the last occurrence of an S&P 500 Golden Cross happened in late October, 2009 (chart above) as the market worked hard to recover from the shock of the financial crisis that froze the domestic credit markets.  The similarities in the charts from then and now are profound and should be taken into consideration as we move forward over the next few weeks as the S&P 500 moves towards this potentially bullish event. 

    For now, the preparation for the Golden Cross is to increase exposure to the market-leading sectors and stocks as investors will likely target these issues given that they remain risk adverse, but looking for investments that are breaking higher.  For this reason, the stocks that have been working will continue to lead the market higher instead of the riskier, lagging stocks like technology and Financials slingshotting higher.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: SPY
    Jan 06 9:04 AM | Link | Comment!
  • July S&P 500 Seasonality
    Month-to-date, June has played out to its historical tendencies as the S&P 500 Index (SPX) has lost more than five percent for the month. Fears surrounding the fiscal situation in Greece and other Euro Zone countries have frayed the nerves of already jittery investors. Adding another layer to the market’s uncertainty are the fluctuating economic data points that have re-raised some doubts on the strength of an economic recovery. With the fundamental picture for stocks showing signs of struggling, the technical and seasonality trends of the market are likely to play a continued heavy hand on the market’s direction.
    For purposes of this report, I will stick to the quantitative data on July seasonality as some positives are present in the data. Looking back to 1950, the SPX averages a positive return of one percent for the month of July. The average positive returns for the month of July are based on a win rate of 54%. Narrowing the look back period to include the last 21 years (since 1990) the yields become less robust as the S&P averages a performance of just 0.7% for the month, positing “winning” months in 10 out of the 21 months (48% win rate). Narrowing the testing period even more to include only the last eleven years tightens the average return to 0.2% with a win rate of 45% (5 of 11 months positing positive returns).
    From a seasonality perspective, July often provides a much-needed rest from the first round of selling that often results from the “sell in May” phenomenon that often drives the knee-jerk selling as we enter the lightly traded months. This year, the results are falling into the same pattern that we are growing accustomed to seeing as the economy, geopolitical concerns and consumer confidence have been flagging. Earnings season is set to kick off in two weeks as Alcoa will announce its quarterly results on Monday, July 11. This earnings season may have a larger impact than the last two as the market will be looking for a catalyst to pull stocks out of their two-month slump.
    Tags: SPY
    Jun 27 10:03 PM | Link | Comment!
  • Strong Seasonality Ahead for the Market

    Despite the wild turns that the market has taken through the month of March, the S&P 500 and other major indices are close to posting flat returns for the month.  As we’ve pojn ted out, the underlying fundamentals of the market appear to be helping to shore-up strength for stocks, but there’s also a seasonality effect helping stocks that investors should remain aware of.

     Since 1950, the month of March has been the fourth best month for returns on the S&P 500, signaling a strong seasonality effect that may be helping the markets work through the worries caused by tensions in the Middle East and the catastrophe in Japan.

     Looking forward, the month of April also usually benefits from historical seasonality trends.  Again, since 1950, the month of April is the third best month of performance for the S&P 500.  Over this time period, the S&P 500 has posted average positive returns of 3.5% 69 percent of the time.

    The table below displays monthly seasonality figures for each month since 1950.  Numbers in parenthesis after each month identify their overall rank based on average performance of winning and losing months.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Mar 28 1:37 PM | Link | Comment!
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