Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
If you are scouring around the financial internets (sic), you are probably hearing much about the “golden cross” that just occurred in the S&P 500. This is simply when the 50 day moving average crosses above the 200 day moving average. Like all things technical analysis, it is something that takes on more significance the more people in general use technical analysis. As an example of this, I like to use the example of the sweater salesman in Miami. If said salesman saw a pattern where sweater sales rose each time the temperature went over 80 degrees he would scratch his head at this random pattern. However, being a business person you can bet he would stock up on sweaters when he saw the forecast was portending temperatures over 80 degrees. At its most basic, that is how I read technical analysis. There is no real significance to the 200 day moving average (versus the 161 moving average or the 134 moving average), other than the fact the crowd gives it significance. And when so much money follows specific patterns, it tends to self reinforce.
Along those lines a popular broad technical tool is to get bullish when the 50 day moves over the 200 day. It can be fundamentally interpreted by saying recent price action is stronger than older price action – which in and of itself says nothing other than recent price action has been good RELATIVE to action 4-5-6 months ago. That doesn’t mean the next 2 months or 4 months will be better, unless you believe physics plays a role in markets – i.e. a body in motion tends to stay in motion.
We are now seeing a golden cross in the S&P 500 as the chart below shows:
One can see that the last 2 occurrences, marked with the blue arrows led to significant rallies over the coming 4-6 months – albeit not necessarily immediately.
Last evening Cramer had an even handed assessment of the significance of the golden cross, and points out how it has become more accurate of a tool in more recent years. In my opinion part of that has to do with the fact I think far more people have come onto the technical analysis train in the 70s, 80s, 90s, etc then prior to that, when perhaps a small cult was even thinking about such things.
7 minute video – email readers will need to come to site to view.
Also, some data points 1930 forward from Ritholtz here showing golden crosses have worked far better 1960s forward when the 50 day is crossing a FALLING 200 day (as is the case now) and far better 1980s forward when the 50 day is crossing a RISING 200 day.
As an aside, “Death Crosses” (in which the inverse happens – the 50 day crosses below the 200 day) are much less useful as an indicator in my opinion. But that is just from ‘feel’ and I don’t have the data in front of me.
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