S&P 500 set to hit its first golden cross in 2 and a half years

S&P 500 set to hit its first golden cross in 2 and a half years

The S&P 500 is poised to achieve its first golden cross in two and a half years, but that doesn't mean that stocks are destined for more gains over the next year.

Technical analysts use the golden-cross indicator as a sign that a certain upward trend in markets or currencies is gaining momentum. Barring a huge selloff in stocks, the S&P 500's 50 day moving average should cross its 200 day moving average in a matter of days.

According to FactSet data, if it happens, it would be the first such event since July, 2020. It often precedes further gains for stocks over the next six months, or a year, but not always.

The S&P 500 has seen 52 golden crosses since 1930, according to Dow Jones Market Data, which used back-tested data to account for the index's performance prior to its creation in 1957. One year later, the stocks were trading higher, 71% of the time.

During periods of heightened volatility there have been some notable exceptions.

The S&P 500 SPX declined during the 12 months that followed the golden cross that occurred on April 1, 2019, according to Dow Jones Market Data. This happened again in 1999 as the dot-com bubble burst, and also in 1986 after a golden cross that occurred before the Black Monday crash.

The Dow Jones Industrial Average DJIA has hit its most recent golden cross back in December, and stocks have since moved higher.

The way we think about it is that all big rallies start with a golden cross, but not all golden crosses lead to a big rally. Ari Wald, head of technical analysis at Oppenheimer, said it was just one piece of the puzzle.

See: U.S. stocks flash rare bull-market signal for the first time in nearly 3 years, but some have their doubts.

There have been some encouraging signs that the U.S. stocks could be headed for a long turnaround. One example of Wald was the so-called advance-decline line, which recently reached a new cycle high.

Technical analysts say that it is a measure of market breadth, which shows whether the major equity index's gains are being powered by a broad range of stocks or a handful.

The advance-decline line hit 2.2 on Thursday, its highest level in nearly a year.

The fact that technology and consumer discretionary are among the best performers since the beginning of the year is another encouraging sign, according to Wald.

Communication services, consumer discretionary and information technology are the three best performing sectors of the S&P 500 so far this year, with communications services up more than 15% since Jan. 1.

With so much uncertainty surrounding monetary policy and the macroeconomic outlook, some analysts doubt that the stock market will return to business as usual, even though inflation has moderated over the past six months, adding pressure on the Federal Reserve to raise interest rates.

Despite its historical record, traders who are desperate for confirmation that the market sell-off of 2022 is over should approach indicators like the golden cross with trepidation, according to one analyst.

The golden crosses have worked, and there have been more secular trends in the past 20 years, said Will Tamplin, senior analyst at Fairlead Strategies. In an environment that is a bit choppy, you can get the whipsaws. The S&P 500 and the SPDR S&P 500 exchange-traded fund SPY, touched new intraday highs for the year on Friday, while the Nasdaq Composite COMP was briefly traded at its highest level since September. The Dow Jones Industrial Average is on track for a weekly gain of more than 2.3%, which would be its best performance since November.