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 coming year.
The golden-cross indicator is used by technical analysts as a sign that a particular upward trend in markets or currencies is gaining momentum. Barring a massive selloff in stocks, the S&P 500’s 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. Data show it often does 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.
But there have been some notable exceptions during periods of heightened volatility.
The S&P 500 SPX, +0.69% 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.
The Dow Jones Industrial Average DJIA, +0.46% achieved its most recent golden cross back in December and stocks have since moved higher.
Technical analysts who spoke with MarketWatch said that while the golden cross can be a helpful sign that a given trend probably has more room to run, it helps to look for other signs as well.
“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
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.
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 since the start of the year is another encouraging sign, according to Wald.
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 15% since Jan. 1.
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 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 and SPDR S&P 500 exchange-traded fund SPY, +0.69% touched new intraday highs for the year on Friday, while the Nasdaq Composite COMP, +1.46% 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%, what would be its best such performance since November.
This article was originally published by Marketwatch.com. Read the original article here.