The Golden Cross A Bullish Technical Signal on February 2, 2023

This week’s topic, technically speaking, the S&P500 achieves a “Golden Cross” on 2/2/2023, and historically, that is a good thing.

For the better part of the second half of 2022, viewers of financial news and readers of internet financial newsletters were bombarded with a constant negative message supposedly “backed up” by an ominous chart of the S&P 500. The negative messaging was the coming “collapse” of the US stock market in the 4th quarter of 2022 and the first quarter of 2023. This is even though the S&P500 had already dropped over -27.5% peak to trough in nominal terms and – 35% in real terms from its early 2022 peak. These declines were in line with the average bear market, the average recession decline for stocks, and normal mid-term 2nd-year Presidential decline.

Time for the Bulls?

For the better part of the second half of 2022, viewers of financial news and readers of internet financial newsletters were bombarded with a constant negative message supposedly “backed up” by an ominous chart of the S&P500. The negative messaging was the coming “collapse” of the US stock market in the 4th quarter of 2022 and first quarter 2023. This is even though the S&P500 had already dropped over -27.5% peak to trough in nominal terms and – 35% in real terms from its early 2022 peak. These declines were in line with the average bear market, the average recession decline for stocks, and normal mid-term 2nd year Presidential decline. None the less, the purveyors of doom wearing black turtlenecks were grabbing headlines virtually every day on CNBC, Fox News, Bloomberg TV and virtually every subscription newsletter I was forwarded.

Here’s one of the many 2008 versus 2022 “overlays” that were making the rounds in the 3rd quarter of 2022. This one was circulated by Mott Capital. If one just looked at the chart one would think that Mott Capital was running money for their clients and investing in this strategy. Alas, a little bit of quick research shows that Mott Capital is another newsletter subscription seller, not a fiduciary investment manager. This chart and other similar ones were everywhere, so much so that Jim Cramer even did a Mad Money piece on the subject in August 2022.

Viewers, I said it back then multiple times, almost fighting with a few friends over this supposed “overlay”. This was not a real correlation, comparison, or overlay. The purveyors of this story conveniently adjusted the time axis to make this time series look legit. The S&P500 essentially peaked in mid-July 2008. The S&P500’s all-time closing high this cycle was Jan 3rd, 2023, almost 10% higher than its mid July 2022 highs. That’s not when or how the top in front of the Great Financial Crisis looked. I do not know if Mott Capital has updated their “Overlay” or publicly said, “never mind, we were wrong”, but I imagine the answer is no.
While things might rhyme a lot in financial markets, things are never exactly the same. However, historically speaking there are data sets, using more than one time frame, that have happened multiple times across history that can be combined with rational thinking and an investing process.

The purveyors of doom and negative time series, legitimate or not, get lots of airtime in the media, because selling fear almost always works. Promoting Death crosses which historically have been poor indicators or comparisons to the Great Depression or Great Financial Crisis is great for selling subscription newsletter memberships or getting airtime on stages. Meanwhile, those who discuss historically positive investment dynamics, get very little airtime. I’m here this week to discuss the historical importance and rarity of what transpired on 2/2/2023 in the S&P500, the Golden Cross.

I am Chris Perras with Oak Harvest Financial Group in Houston, Texas and welcome to our weekly stock talk podcast, keeping you connected to your money. This week’s topic, technically speaking, the S&P500 achieves a “The Golden Cross” on 2/2/2023 , and historically, that is a good thing. Before I get going, please take a moment to click on the subscribe button and click on the notification bell so you will be alerted when our team uploads our latest content. Our investment material has a new place on the Oak Harvest YouTube channel as a separate sub-channel , and we also now have a totally separate channel titled “Stock talk with Chris Perras”.

First off, what’s a “Golden Cross in the stock market? Well, this occurs when the 50-day MVA crosses and moves above the 200-day MVA. As the name suggests, historically, this is a good thing and a bullish technical signal for future returns. As always, no guarantees in the stock market. Most of the data we will be referencing comes from the wonderful work of Steve Suttmeier, chief technical strategist at Merrill Lynch. Here’s a chart of the S&P500 with the “Golden Cross” on Feb 2 highlighted by the shaded circle.

The Golden Cross triggered on Feb 2nd was only the 49th occurrence over the last 95 years, since 1928. Historically, returns after a golden cross are stronger than average returns over 30, 65 and 195 days, 75% of the time. The 195-day return, a little over 3 quarters of a year, has averaged about 10.75% during the prior 48 occurrences.

Even more interesting, is the higher average 105-day return when the 200-day MV is declining, as it is now. When the previous years returns were worse like 2022. That has happened 19 times in the past and the average return over the next 3+ quarters average a little over 13%.
What’s truly interesting to me is how this indicator has its highest success rate and highest potential returns when the news is the worst! When the economy is in recession? When investors are most despondent on the economy and stocks, this indicator has really earned its name as Golden.

By traditional measures we had a recession in the 1st half of 2022. 2 consecutive negative real GDP quarters. 2 quarters of real economic contraction. No, the government body who puts their stamp of approval on this, NBER, didn’t say we had one. But the stock markets acted like we had one throughout the first half of 2022.

We will stick with NBER recession definitions for this video because that’s what Merrill’s data tracked. Over the last 95 years, the NBER has declared 15 recessions. The S&P500 has generated 14 Golden Crosses during 13 of these 15 recessions, the 1929-1933 recession had 2 Golden Crosses per Suttmeier’s work. Almost 93% of the time, which is an extremely high hit rate, over the next 195 days, the S&P500 on average
returned 22% on average. This was also the median return, so the data was very tight. Here’s the Merrill Lynch summary data for these types of time periods. We’ve attached the raw data at the end of this presentation for those who want to see the nitty gritty and maybe compare the current period to your favorite recessionary period.

What’s also should be interesting to investors is that as Jeff DeGraaf of RenMac points out, the S&P500 has historically provided investors with a higher Sharpe Ratio, or “risk-adjusted” returns, during periods with a positive Golden Cross.. This means that historically, the upward ride during these periods is usually less volatile and smoother for investors. That investors receive higher returns per unit of risk as measured by volatility. That of course would be a great thing for investor anxiety. Here’s Jeff’s work showing the two distribution curves for risk adjusted returns. The shift in the Sharpe Ratio curve to the right shows the decrease in return volatility and increase in Sharpe Ratio. It’s just the math, and of course there are no guarantees, but this too would say that the next 3 quarters should be looking up, not down for investors.

 

Viewers, historically, we remain in the best part of the Presidential Cycle for investment returns, that being from late 3rd quarter of year 2 which was 2022, through Year 3 of the cycle. This combined with the above data about the Golden Cross and hedge fund positioning heading into 2023 could continue to provide a tailwind for the markets into mid second quarter before being subjected to the usual summer market slowdown.

If the ongoing market volatility is making you feel uneasy, give us a call, and schedule a meeting with an Oak Harvest advisor. Our team has multiple tools, both market based and insurance based, that we can use to meet your retirement goals. . However, we remind you, that insured investments may also lower your long-term expected investment returns.
At Oak harvest, we think our clients are best served by us helping them plan for their future needs, instead of focusing on the past. The future and stock markets are always uncertain and that is why our retirement planning teams plan for your retirement needs first, and your greed’s second.

Give us a call to speak to an advisor and let us help you craft a financial plan that helps you meet your retirement goals. Call us here at Oak Harvest and schedule an advisor consultation. We are here to help you on your financial journey into and through your retirement years.