Market Extra: S&P 500 achieves first ‘golden cross’ in 2½ years, but this doesn’t guarantee more gains ahead

The S&P 500 achieved its first “golden cross” in 2½ years, but that doesn’t mean stocks are destined for more gains in 2023.

The golden-cross indicator is used by technical analysts as a sign that a particular upward trend in markets or currencies is gaining momentum.

After the close on Thursday, the 50-day moving average for the S&P 500 stood at 3,953.61, a hair higher than the 200-day moving average, 3,951.58. This marks the first time this pattern has appeared since July, 2020, according to FactSet data.

What does this mean for investors? Historical market data show golden crosses often precede further gains for stocks over the following six months, or a year. But not always.

The S&P 500 has seen 52 golden crosses since 1930, according to Dow Jones Market Data, which used back-tested data to account for the index’s performance prior to its creation in 1957. In that time, stocks were trading higher one year later 71% of the time.

However, there have been some notable exceptions during periods of heightened volatility.

The S&P 500

declined during the 12 months that followed the golden cross that occurred on April 1, 2019, according to Dow Jones Market Data. This happened again in 1999 as the dot-com bubble burst, and also following a golden cross that occurred in1986, preceding the “Black Monday” crash.

Other indexes have seen golden crosses in recent months. The Dow Jones Industrial Average

achieved its most recent golden cross back in December, and it’s moved higher since, although its momentum has started to wane in recent weeks.

Technical analysts who spoke with MarketWatch said that while the golden cross is a helpful sign that stocks could have more room to run, technical analysts like to look to other indicators for confirmation.

“The way we think about it is all big rallies start with a golden cross, but not all golden crosses lead to a big rally. It’s just one piece of the puzzle,” said Ari Wald, head of technical analysis at Oppenheimer.

See: U.S. stocks flash rare bull-market signal for first time in nearly 3 years, but some have their doubts

Recently, there have been some other encouraging signs that U.S. stocks could be headed for a lasting turnaround. One example Wald cited was the so-called advance-decline line, which recently reached a new cycle high.

According to technical analysts, that’s a measure of market breadth which shows whether the major equity index’s gains are being powered by a broad range of stocks, or a handful.

Another encouraging sign, according to Wald, is the fact that cyclical sectors like technology and consumer discretionary are among the best performers since the start of the year.

FactSet data show that communication services, consumer discretionary and information technology are the three best-performing sectors of the S&P 500 so far this year, with communications services up more than 23% since Jan. 1.

With so much uncertainty about monetary policy and the macroeconomic outlook, some analysts doubt that the stock market will simply return to business-as-usual so quickly, even as inflation has moderated over the past six months, taking some of the pressure off the Federal Reserve to continue to raise interest rates.

One analysts warned that traders who are hungry for confirmation that the market sell-off of 2022 is indeed over should approach indicators like the golden cross with trepidation, despite its historical record.

“In the past 20 years there have been more secular trends, and the golden crosses have worked,” said Will Tamplin, senior analyst at Fairlead Strategies. “But in an environment that’s a little more choppy, you can get the whipsaws. “

The S&P 500 finished Thursday’s session at 4,179.76, its highest closing level since Aug. 25, according to FactSet data. It has risen nearly 9% since the start of the year.

What is your reaction?

In Love
Not Sure

You may also like

Leave a reply

Your email address will not be published. Required fields are marked *

More in:News