Clusters of "Golden Cross" formations -- a positive sign for stock?
Just over a week ago, on Feb. 3, the Nasdaq Composite (COMP) experienced what market technicians call a “Golden Cross.” That is when the 50-day moving average crosses above the 200-day moving average. This pattern is often viewed as bullish, as it can be used to determine whether we're in a bull or bear market trend.
Below is a chart showing the S&P 500 Index (SPX), along with different-colored markers showing when each of the three major equity indexes -- the Dow Jones Industrial Average (DJIA), SPX, and COMP -- had a golden cross. Note that each of those indexes has had a cross already this year: the Dow on Jan. 3, the SPX on Jan. 31, and the aforementioned COMP cross on Feb. 3.
Individual Indexes and a Bullish Sign
Let us now determine if the golden cross is truly a bullish sign for these indexes! Below are three tables showing the average returns for the indexes after they experience a cross, looking at time frames ranging from one month to one year. When calculating average returns, if multiple golden crosses happened within a month's time frame, the first signal is the one that is only considered. Each table also has the typical returns since 1975, for the sake of comparison.
Looking at the tables, you'll notice a cross on the Dow has actually been slightly bearish compared to typical returns. But for the SPX and COMP, the returns are bullish across all time frames.
All Indexes Influenced
The span of 31 days -- from Jan. 3 to Feb. 3 -- in which all three indexes experienced a cross, was a very short time frame for that to happen. This makes it quite difficult to determine as to whether this might be more bullish than a typical signal. Using the SPX as the gauge, below are the dates that saw all three indexes complete a cross within two months of each other, or 60 days.
As you can see from the tables below, this is an extremely bullish indicator. The 13 times in which these three indexes formed a cross within two months of each other saw an average return of 10% over the next six months, and 15% over the next year. Typically, the SPX averages a gain of just 4.4% and 9.1%, respectively, over those time frames. Furthermore, six months after a "triple cross" occurrence, the SPX was positive all 13 times -- compared to just 69% positive over a typical six-month time frame. So, in the past, this rare event has had very bullish implications for the market.