Technicals | Jun 22 2009
By Chris Shaw
BTIG chief market strategist Mike O’Rourke notes US market indicators are getting better as earlier in June the S&P500 index closed above its 200-day moving average for the first time since December of 2007. Barring a significant sell-off anytime soon (which appears rather unlikely) the 50-day moving average for the index should cross above the 200-day moving average this week, potentially as early as by the close of trading on Tuesday.
O’Rourke notes this would generate the bullish “Golden Cross” technical signal, the opposite of the bearish “Dead Cross” signal and one he notes is particularly effective in a strongly trending market. This is of relevance as the current market is one of the strongest trending markets in history in O’Rourke’s view.
From October 2007 to March 2009 the S&P500 index fell by 57% with the Dead Cross signal coming in December of 2007, meaning those investors who took notice of the signal avoided more than 560 points or 38% of the decline. At present the 50-day moving average has been below the 200-day for 546 days, which is the fourth longest such period since 1929, while there were another seven such periods of at least 324 days.
Taking guidance from historical precedents, O’Rourke notes both crosses seem to be particularly relevant for longer term investors with history suggesting the share market has seen its lows for years to come once a Golden Cross is in place. For instance, it took the current bear market, and six years, for the S&P500 index to revisit the lows recorded in the bear market of 2000-2003.
O’Rourke also notes the Golden Cross signal appears to be a good market entry signal with history showing average returns have been 8% over the next three and six months and 20% over the next year (taking guidance from the ten longest durations of the 50-day MA below the 200-day MA since 1929). Taking guidance from shorter duration periods still generated positive returns of 9.5% for the first three months, 10.9% for six months and 16% for one year after the Golden Cross signal was generated.
It probably won’t surprise anyone then that O’Rourke suggests the March lows will likely prove to be the bottom for the current bear market.
