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A Golden Opportunity for the Markets

|Includes: SPDR S&P 500 Trust ETF (SPY)
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.