Indicator of the Week: 2 Signs Stocks Could Get Hotter This Summer

The S&P 500 Index's (SPX) outperformance in 2016, as well as its recent golden cross, could bode well for stocks in the short-to-intermediate term

Senior Quantitative Analyst
Apr 27, 2016 at 7:00 AM
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I'm taking a look at a couple of quick items I came across this week, which could have positive implications for stocks in the short-to-intermediate term. First, I'm looking at how three major indexes have performed so far this year, and dissecting past data for clues about what is to come. Then, I'll break down the historical implications of the S&P 500 Index's (SPX) recent golden cross.

The chart below shows the year-to-date performance of the large-cap S&P 500 Index (SPX), the small-cap Russell 2000 Index (RUT), and the tech-heavy Nasdaq Composite (COMP). The SPX, up over 2% on the year, leads the other two indexes. The RUT is just above breakeven, while the Nasdaq lags, down just over 2%. 

                            SPX RUT NASDAQ

The S&P 500 Leads: The tables below show stocks have historically done very well when the large-cap S&P leads the other two indexes at this point in the year. Specifically, going back to 1980, during the 11 years when the SPX led the other two indexes, it gained an average of 5.86% through the end of August (about four months later), and was positive in 10 of those 11 years. The other two indexes were even more impressive, averaging double-digit percentage gains over the next four months.

When the RUT or the COMP led, stocks did poorly over the next four months. In that case, all three averaged a loss through the end of August, and less than half of the returns were positive. In other words, when large-caps lead through April, then it's good for stocks over the next four months. Hopefully, that trend will continue.

                                            SPX leads comparison chart

Golden Crosses: On Monday, the S&P 500 experienced a golden cross. That is when the 50-day moving average of the index crosses above the 200-day moving average. You can see in the chart the last time it happened was near the end of 2015. That turned out to be disastrous, as the S&P 500 subsequently collapsed early in the year.  Before that, the last golden cross occurred in January of 2012. 

                            SPX golden crosses chart

It's generally thought that golden crosses are bullish while death crosses (the opposite of the golden cross, when the 50-day moving average crosses below the 200-day moving average) are bearish. I quantified the returns after the last 20 golden crosses and death crosses to see if this was true. 

The first table below shows how the S&P 500 performed after golden crosses. The second table shows returns after death crosses, and the last table shows typical returns since 1977 (the year of the first golden cross and death cross).

In the very short term (out to two weeks), the popular interpretation of the golden cross and death cross seems to be accurate. Stocks have tended to do well after golden crosses, with the S&P averaging a gain of almost 1% and positive returns 70% of the time in the next two weeks. After a death cross, the index has averaged a slight loss and enjoyed positive returns only 55% of the time. The 'anytime' return statistics usually fall between the two.

When you go out longer term, to six months, golden crosses and death crosses have similar average returns, with golden crosses resulting in positive returns more often than death crosses (84% vs. 68%). Both of the average returns outperform the 'anytime' returns. 

                                 SPX golden crosses death crosses returns 

 

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