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One of the many technical signs that the stock market was recovering from the brutal bear market of 2008 was the “golden cross” on the S&P 500 index in late June 2009. There is a lot of granular research based on the idea of “golden crosses” - among them, the fact that when the 200 day moving average is trending higher, as it is now, the returns from the signal are much lower than if it were trending lower.
But overall, the “golden cross” acts true to its name. According to John Spinello, chief technical strategist at Jefferies Group, if you bought the S&P 500 index based on the eight “golden cross” events in the past 20 years and held until there was a “death cross”, you would have a 191% return. If you had done the opposite and sold short instead, the returns would be negligible.
Right now the S&P 500 index is about to give us a similar signal. The 50 day moving average stands at 1117.52 and the 200 day moving average at 1120.93 so even if the index falls for the rest of the week, we’re still going to see a “golden cross”:
The Dow Jones Industrial index has already had its “golden cross” on October 1st, 2010. And the Nasdaq Composite is even closer; the 50 day moving average closed at 2287.53 today while the 200 day moving average is at 2294.59 - a difference of just 7.06 points. So we about to see a confluence of “golden crosses” within a short time for all major indexes.
The only problem is that we are seeing a whiplash in the moving average cross-overs since the market is still within a range. It was only four months ago that we had a “death cross” (early July 2010) - when the 50 day moving average fell below the 200 day moving average. Since then the market has gone in the opposite direction of the suggested signal direction and gained 13%. So much for that.
But it is important to remember that these patterns hold true on average - not every single time. Like seasonality or the presidential cycle, they hold powerful sway over the market but are never to be considered as a dictatorial mandate.
As well, according to a study done by Jason Goepfert, when we have similar back-to-back signals - that is reversing a “death cross” with a “golden cross” within a 3 month period. The results are lackluster, showing that within a year the S&P 500 index is slightly higher (+1.4%) with a 60% positive occurrence.
So as I take a look over the horizon based on technical and sentiment indicators, I’m ambivalent. It is difficult to come to a strong conviction based on what I’m looking at, including this imminent “golden cross”. And it does my confidence no good to continue to see Lowry Research hold steadfastly to their bullish convictions.
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