Why The Price Surge Is A Good Sign

Golden

The concept of a Golden Cross is over-hyped, but it’s still a popular question. Putting some context to it, when the S&P’s 50-day average crosses above its 200-day after a medium-term decline, forward returns were okay, but nothing special. Over the next three months, an investor's average reward was barely higher than their average risk.

Big rally in a flat market

The rally to generate that signal meant an impressive gain over the past few months, even though the S&P 500 is flat relative to where it was over a year ago. That is usually seen after a big drop from a peak, then a momentum-driven rally.

Unlike the Golden Cross, this was a good signal for future returns. Most impressive was the risk vs. reward over the next few months. For up to three months later, the S&P’s risk was a minimal -1.2%.

Indiscriminate buying

All 11 major S&P sectors gained for the quarter, and all were up more than 5%. That kind of broad-based buying interest led to more gains almost every time, especially since the late 1930s, and especially when the quarter was not mired in a recession.

Sentiment-driven

Most of the S&P’s rebound has been due to a jump in the P/E Ratio.

The S&P has shown better gains in the months following those types of rallies than it did when earnings growth was more of a factor.

Nice start to the month

The S&P jumped more than 1% and closed at a 100-day high to start the month. This has happened 33 other times, with 21 of them closing below the prior month’s close within 50 days.

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