A Golden Cross for the S&P 500 Index
By John Derrick, Director of Research
On Friday, the S&P 500’s 50-day moving average crossed above the 200-day moving average. This is often referred to as a “golden cross” because it indicates that the current positive direction of the market is likely to continue. This is often a long-term investment signal and sometimes these crosses persist for years before the 50-day moving average crosses back below the 200-day moving average.
The golden cross is noteworthy because some investors use it as a trading indicator. If you had used this as a trading strategy, and bought the index when the 50-day moving average crossed above the 200-day moving average and sold when it crossed below, your average gain over the past 20 years would have been more than 26 percent.
This strategy attempts to capture long-term trends in the market, and the cross is a relatively rare occurrence. Over the past 20 years there have only been eight occurrences where the 50-day moving average crossed above the 200-day moving average and in every instance, the cross was followed by an upswing in the market.
Broad-based stock indices have experienced one of the worst decades in history and many investors are fearful and vividly remember the crash of 2008. No one knows if this is the beginning of the next major bull market but history is on your side. Putting money to work in the stock market in the current environment appears to offer a favorable risk/reward profile.
The world is full of negative headlines and reasons for you to not invest, but the old saying that the market “climbs a wall of worry” seems appropriate here.
