We Like Our Crosses Golden

technical chart lookJon Markman:  The Nasdaq 100 has lifted enough out of its mid-summer spill to generate a “golden cross.” This occurs when the 50-day average of an index crosses up and over its 200-day average. It shows that a recent negative period has been largely erased, and that buyers are once again ascendant.

Most of the smarties in the technical analysis subculture pooh-pooh this indicator because it is so simplistic. But let’s face it: The cross signifies a change of sentiment, and that is worth recognizing.

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Bespoke Investment Group analysts are largely in the skeptical camp, but they checked their database and found eight prior instances in which one occurred for the Nasdaq 100 throughout its history. Below is their table highlighting the performance of the index over the next week, the next month and the next three months following the day that the cross happened.

As you can see, in the week after the golden cross, the Nasdaq 100 has actually averaged a decline of 1.05% with positive returns just 37.5% of the time. So, instead of being bullish, in the very near term the cross has been bearish, at least for the Nasdaq 100 specifically.

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Over the next month and three months, though, the index has done well, according to the Bespoke analysis. The average change in the month following a golden cross for the Nasdaq 100 has been 2.44% and positive returns have occurred five out of eight times. Over the next three months, the index has averaged a gain of 1.89% with positive returns 75% of the time, the data shows. In the three-month period, the median is much stronger at +4.65% due to one huge down move of 20% in the three months following the golden cross on June 4, 1990. That was when Iraq invaded Kuwait.

While there might be some hesitation or consolidation short term, the data suggest that bulls have a fighting chance of finding success through the end of the year despite the many troubles in the world of finance and geopolitics, including stretched valuations, widening bond spreads, relatively weak corporate earnings and flat revenue growth. Hey, can’t have everything.

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