All hail the Golden Cross

Does its appearance in the charts say much about where the market is headed?

By Kim Peterson Feb 1, 2012 5:23PM
Image: Crystal ball (© Brand X Pictures/Jupiterimages)Traders are rejoicing that a "Golden Cross" briefly appeared in the Standard & Poor's 500 Index ($INX). But does it actually mean that much?

Some think so. In fact, the Golden Cross seems to be a better indicator about where the stock market is headed than the other side of the coin, which would be the "Death Cross." The S&P 500 usually gains about 10.2% in the 12 months following a Golden Cross, The Wall Street Journal reports.

The Death Cross? Despite its terrifying name, it leads to an average 3.5% gain for the S&P 500.

The Golden Cross occurs when the S&P 500's 50-day moving average crosses above the 200-day moving average. It could happen with any security, but when it happens with the S&P 500, people notice. This has happened 26 times since 1962.

The following video discusses whether the Golden Cross is a flashing "buy" sign.

Post continues below.
Investors seize upon the Golden Cross as reason to be bullish about the market. And we've seen some of that enthusiasm in the uptick this week in the SPDR S&P 500 Trust (SPY) exchange-traded fund, which briefly passed $133 Wednesday.

Birinyi Associates has studied the six-month period following a Golden Cross, and said stocks go higher 81% of the time for an average gain of 6.6%, the Journal reports.

So should we all rush out to buy? Blogger Eddy Elfenbein is skeptical of technical milestones. "After all, the S&P 500 has already soared a good deal off its October low," he writes. "It seems strange to say after a very solid rally that now is the time when things looks good."

He's right. We've seen a 20% jump in the index since October. If stocks follow history and go 6.6% higher in the next six months, well, that would just be the icing on top of an already delicious cake.

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