S&P 500 is approaching the first ‘golden cross’ in 2.5 years, but this does not guarantee more gains in the future
The S&P 500 is on the verge of achieving its first “golden cross” in two and a half years, but that doesn’t mean stocks are destined for more gains over the next year.
Technical analysts use the golden cross indicator as a signal that a particular uptrend in markets or currencies is gaining momentum. Barring a stock sell-off, the S&P 500 50-day moving average should cross its 200-day moving average in a matter of days.
If it happens, it would mark the first such event since July 2020, according to FactSet data. The data shows that it often precedes larger gains for stocks over the next six months or a year, but not always.
The S&P 500 has seen 52 gold crosses since 1930, according to Dow Jones Market Data, which used tested data to account for the index’s performance before its creation in 1957. At the time, stocks were trading up a year later than 71%. weather.
But there have been some notable exceptions during periods of increased volatility.
The S&P 500 SPX,
declined during the 12 months following the golden cross that occurred on April 1, 2019, according to Dow Jones Market Data. This happened again in 1999 when the dot-com bubble burst, and also after a golden cross that occurred in 1986, before the crash of “Black Monday”.
The Dow Jones Industrial Average DJIA,
achieved his most recent gold cross in December and stocks have risen ever since.
Technical analysts who spoke to MarketWatch said that while the golden cross can be a useful signal that a given trend likely has more room to run, it helps to look for other signals as well.
“The way we think about it is that all great rallies start with a golden cross, but not all golden crosses lead to a great rally. It’s just one piece of the puzzle,” said Ari Wald, Oppenheimer’s head of technical analysis.
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There have been some other encouraging signs that US stocks could be headed for lasting change. One example Wald cited was the so-called advance-decline line, which recently hit a new cycle high.
According to technical analysts, that’s a measure of market breadth that shows whether gains in the main stock index are being driven by a wide range of stocks or just a few.
The advance-decline line hit 2.2 on Thursday, its highest level in nearly a year.
The fact that cyclical sectors such as technology and consumer discretionary are among the best performers since the beginning of the year is another encouraging sign, according to Wald.
FactSet data shows communication services, consumer discretionary and information technology are the top three performing sectors in the S&P 500 year-to-date, with communication services up more than 15% from January 1st.
Yet with so much uncertainty about monetary policy and the macroeconomic outlook, some analysts doubt the stock market will simply return to normal that quickly, even as inflation has moderated over the past six months, taking something away pressure on the economy. Federal Reserve to continue raising interest rates.
One analyst warned that traders hungry for confirmation that the 2022 market selloff is over should approach indicators like the golden cross with trepidation, despite its all-time high.
“In the last 20 years there have been more secular trends and the golden crosses have worked,” said Will Tamplin, a senior analyst at Fairlead Strategies. “But in an environment that’s a little more hectic, you can get the fake saws. “
The S&P 500 and SPDR S&P 500 SPY exchange-traded fund,
hit new intraday highs for the year on Friday, while the Nasdaq Composite COMP,
it briefly traded at its highest level since September. The Dow Jones Industrial Average is on track for a weekly gain of more than 2.3%, which would be its best performance since November.