After hitting record highs in recent days, the S&P 500 just flashed an indicator for more gains ahead.
On Tuesday, the index’s 50-day moving average of 5,846.34 closed above its 200-day moving average of 5,837.96, a bullish technical pattern known as a golden cross.
It’s the first time the indicator has flashed since February 2023.
Historically, the golden cross has been seen 38 times in the S&P 500since World War II. In over 70% of these occurrences, the index has closed higher a year later.
A moving average is a commonly used technical indicator that tracks the average S&P 500 closing price over a set period of time. The appearance of a golden cross means short-term price momentum has eclipsed the market’s broader trend, signifying the recent gains could shift the S&P 500’s long-term trajectory upward.
On the other hand, the bearish version of the signal is a death cross, which occurs when the 50-day moving average falls below the 200-day moving average. The S&P 500 and Nasdaq 100 flashed a death cross on April 14 this year at the height of the trade war volatility.
Historically, a strategy of buying the index at the golden cross and selling at the following death cross has led to higher returns than simply buying and holding, Jeff deGraaf, Renaissance Macro’s head of technical research, said in a note on Wednesday.
The strategy has a win rate of 73%, with 27 out of 37 past trades ending in profit and an average gain per trade of 14.7%, according to Fidelity.
Additionally, a crossover strategy has delivered 50% higher risk-adjusted returns than a simple buy-and-hold approach based on the Sharpe ratio, deGraaf said.
The market has made an impressive recovery from April lows. Back in May, the S&P 500 broke above its 200-day moving average. The golden cross comes as market breadth is expanding and more stocks participate in the rally, a sign that the rally has sustained momentum.
On Tuesday, 26% of S&P 500 components hit 65-day highs, deGraaf noted.
By sector, financial stocks are gaining momentum. The Financial Select Sector SPDR Fund (XLF) hit a fresh 52-week high, and seasonal trends for bank stocks, coupled with a more relaxed regulatory environment, point to more gains ahead.
Among consumer discretionary stocks, nearly 60% of names are making 20-day highs. If this sector of the market continues to improve, it could help confirm the next leg of the bull market.
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