The good news is, the S&P 500 and/or the SPDR S&P 500 ETF (SPY) are almost assuredly going to dish out a so-called Golden Cross — a technical buy signal that bulls love to tout as a means of convincing themselves (and others) that a rally is destined to take shape.
The bad news is, that impending Golden Cross is the only good news that can be said about the S&P 500 right now.
Aside from the fact that stocks fell for a third day in a row on Wednesday, stocks are within easy reach of a technical floor that could start a selling avalanche if broken.
Adding to the confusion is the fact that we’re nearing the point in time when a Santa Claus rally should come alive in earnest.
It almost goes without saying that short-term traders as well as long-term investors should tread lightly here, and understand some very important realities of the current situation.
Golden Cross
For those not familiar with the term, a Golden Cross is simply the point in time where a stock’s or index’s 50-day moving average crosses above its 200-day moving average line, suggesting that the market’s bigger-picture undertow has turned decidedly bullish. [It’s also the antitheses of the so-called Death Cross, where the 50-day moves below the 200-day moving average, signaling a bearish trend is underway.]
The prospect sounds exciting, as does the signal’s track record. As Jon Markman points out here, investors have good reason to expect decent gains in the weeks following a Golden Cross.
There’s just one problem with the premise. That problem is, the stock market is supposed to move higher over time. Betting on a bullish outcome after a Golden Cross is a bit like betting the sun will rise.
As (modest) evidence that such crosses aren’t anything particularly helpful to market timers, Death Crosses only indicate bigger weakness is afoot about half the time we see them. The other half, the S&P 500 is up a few months after a Death Cross anyway, as Barry Ritholz explains here.
Point being, take the brewing Golden Cross for the S&P 500 with a grain of salt. In fact…
The S&P 500 and NASDAQ Are Playing With Fire
It’s a bit ironic, but the same day a Golden Cross for the S&P 500 is back on the radar as the same day the S&P 500 has fallen back under the 50-day and 200-day moving average lines.
And this was no one-day stumble, either. The October rally has been nonexistent since early November, indicated by falling MACD lines since then that have been slumping ever since. We’ve also seen a lower high from the S&P 500 since the late-October peak, and, thanks to Wednesday’s drubbing, the S&P 500 just logged a lower low.
Click to Enlarge One day does not make a trend, but all big trends start out as small ones.
With that being said, if traders really want something to worry about, they may want to take a closer look at the NASDAQ Composite. It has already given us a Golden Cross, but a major support level is under attack again. If it fails to hold up as support, that may well start a flurry of selling from an already-nervous market.
That floor is the span between 4941 and 4985, marked by a combination of the converging 50-day, 100-day, and 200-day moving averages lines. This is the first time we’ve seen this degree of convergence since late 2012.
It may well be sign that stocks are at a meaningful inflection point … perhaps for the worst. If the composite should break under that set of support lines, it could lead to much bigger trouble.
Click to Enlarge Or, the NASDAQ as well as the S&P 500 could just do what they’ve done all year long, which is zig just when it looks like they’re going to zag.
And therein lies the problem — we can’t trust this market to behave normally.
This includes responding bullishly to Golden Crosses.
Bottom Line for the S&P
As for what to expect next from the S&P 500 and related instruments like SPY — while the impending Golden Cross is a bullish clue and the dance with some last-ditch support levels has bearish implications, the most plausible outcome from here is arguably more of the same wishy-washiness.
In other words, don’t freak out should the NASDAQ break under 4941, and don’t celebrate if the market manages to recover. Odds are we’ll see more of this back-and-forth action as long as the market is dealing with the valuation headwind few want to admit is actually a problem.
In fact, this bearish action to get the month of December started is in many regards the usual early December action.
Click to Enlarge The chart to the right says it all. Looking at the numbers for the past thirty years, the month gets off to a decent start (possibly fueled by post-Thanksgiving euphoria), then tapers off until the middle of the month when Santa Claus finally arrives on Wall Street, and stays until the end of the year.
It doesn’t look like this December is going to be considerably different than the average.
By mid-January though, it’s anybody’s guess again.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
