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.