The S&P 500 is poised to hit its first «golden cross» in two and a half years, but that doesn’t mean stocks are destined for more gains in the year ahead.
The golden cross indicator is used by technical analysts as a sign that a particular uptrend in markets or currencies is gaining momentum. Barring a massive sell-off in stocks, the S&P 500’s 50-day moving average is expected to cross its 200-day moving average within days.
If that happens, it would mark the first such event since July 2020, according to FactSet data. Data shows that it often precedes further gains for stocks over the next six months or year, but not always.
The S&P 500 has seen 52 golden crosses since 1930, according to Dow Jones Market Data, which used historical data to account for the performance of the index before its inception in 1957. At that time, stocks were trading higher a year later 71% of the time.
But there were some notable exceptions during times of heightened volatility.
The S&P 500 SPX,
declined in 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 dotcom bubble burst, and also following a golden cross that occurred in 1986, preceding the «Black Monday» crash.
The Dow Jones Industrial Average DJIA,
hit its last golden cross in December and shares have since risen.
Technical analysts who spoke to MarketWatch said that while the golden cross can be a helpful sign that a given trend likely has more room to maneuver, it also helps to look for other signs.
“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. That’s just one piece of the puzzle,” said Ari Wald , head of technical analysis at Oppenheimer.
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There were other encouraging signs that US equities could be heading for a sustained rally. An example cited by Wald was the so-called advanced decline line, which recently reached a new cycle high.
According to technical analysts, it is a measure of market breadth that indicates whether gains in the main stock index are being driven by a wide range of stocks, or a handful.
The advance-decline line hit 2.2 on Thursday, its highest level in nearly a year.
The fact that cyclical sectors like technology and consumer discretionary are among the best performers so far this year is another encouraging sign, according to Wald.
FactSet data shows Communication Services, Consumer Discretionary and Information Technology are the three best performing sectors in the S&P 500 so far this year, with Communication Services up more than 15% since then. January 1st.
However, with so much uncertainty over monetary policy and the macroeconomic outlook, some analysts doubt the stock market will simply return to its status quo so quickly, even though inflation has moderated over the past six months, easing part of the pressure on the Federal Reserve continues to raise interest rates.
An analyst has warned that traders craving confirmation that the 2022 market sell-off is indeed over should approach indicators like the golden cross with concern, despite its all-time high.
“Over the past 20 years there have been more secular trends and the golden crosses have worked,” said Will Tamplin, principal analyst at Fairlead Strategies. “But in a bit more hectic environment, you can get the jigsaws. «
The S&P 500 and SPDR S&P 500 SPY exchange-traded funds,
hit new intraday highs for the year on Friday, while the Nasdaq Composite COMP,
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.