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

The S&P 500 is on the cusp of completing its first “golden cross” in 212 years, but it doesn’t guarantee more increases in the following year. Technical analysts use the golden-cross signal to indicate that an upward trend in markets or currencies is gaining traction. Barring a big market selloff, the S&P 500’s 50-day moving average should cross its 200-day moving average within a few days.

S&P 500 nears first ‘golden cross

According to FactSet statistics, if it occurs, it will be the first such occurrence since July 2020. Data suggest that it often precedes additional advances in equities during the next six months or a year, but not always. According to Dow Jones Market Data, the S&P 500 has had 52 golden crosses since 1930, which employed back-tested data to account for the index’s performance prior to its establishment in 1957. Stocks were trading higher one year later 71% of the time at the time.

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However, there have been some noteworthy outliers during times of increased volatility. According to Dow Jones Market Data, the S&P 500 SPX, +0.25% fell in the 12 months after the golden cross on April 1, 2019. This happened again in 1999 when the dot-com bubble broke, and it also happened in 1986, before the “Black Monday” catastrophe. The Dow Jones Industrial Average DJIA, +0.08% last accomplished a golden cross in December, and equities have since risen.

According to technical experts who talked with MarketWatch, although the golden cross may be a useful indicator that a specific trend has more space to run, it is also important to search for other signals. “The way we see it, all major rallies begin with a golden cross, but not all golden crosses lead to a huge rally. “It’s only one element of the picture,” said Ari Wald, Oppenheimer’s director of technical analysis.

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There have been some additional promising signals that US equities may be on the verge of a long-term recovery. Wald used the so-called advance-decline line as an illustration, which just attained a new cycle high. According to technical experts, this is a measure of market breadth that reveals whether the main equity index’s gains are being driven by a diverse range of firms or a small number of businesses.

On Thursday, the advance-decline line reached 2.2, its highest level in a year. According to Wald, another optimistic clue is that cyclical sectors like technology and consumer discretionary have outperformed since the beginning of the year. According to FactSet statistics, the three best-performing sectors of the S&P500 this year are communication services, consumer discretionary, and information technology, with communications services up more than 15% since January 1.

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However, 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 though inflation has moderated over the last six months, relieving the Federal Reserve of some of the pressure to continue raising interest rates. One researcher said that traders looking for proof that the 2022 market sell-off is over should be wary of signs like the golden cross, despite its track record.

“There have been more secular patterns in the last 20 years, and the golden crosses have worked,” said Will Tamplin, senior analyst at Fairlead Strategies. “However, in a more choppy environment, you may get the whipsaws.” On Friday, the S&P 500 and SPDR S&P 500 ETF SPY, +0.23% set fresh intraday highs for the year, while the Nasdaq Composite COMP, +0.95% briefly traded at its highest level since September. The Dow Jones Industrial Average is on course to post a weekly rise of more than 2.3%, its biggest since November.

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