‘Golden Cross’ Seen as S&P 500 Buy Signal to Heed: Chart of Day

U.S. stocks are poised to send a buy signal worth heeding, according to John Spinello, chief technical strategist at Jefferies Group Inc.

The indicator, known as a golden cross, is triggered when the Standard & Poor’s 500 Index’s average close for the previous 50 trading days surpassed the average for the last 200 days. The 50-day moving average was only about seven points away from this milestone as of yesterday’s close.

The CHART OF THE DAY shows the S&P 500’s performance since October 2007, when the most recent bear market started, in the top panel and compares the moving averages in the bottom panel. Circles identify each golden cross and the reverse move, known as a death cross.

During the past 20 years, buying the S&P 500 at the time of each golden cross and holding until the next death cross would have yielded a 191 percent profit, according to data that Spinello cited in a report today. Eight golden crosses happened in the period, and the trade would have made money every time.

Results for the opposite strategy -- short selling the S&P 500 when death crosses were recorded and holding until the next golden cross -- were far less lucrative, the report said. This type of short sale would involve borrowing and selling index-linked securities to profit from declines.

Since the latest death cross occurred on July 2, the index has risen 14 percent rather than falling. The strategy was also unprofitable in six of the previous eight instances, according to Spinello’s data, and those losses would have limited short-selling profits to 30 percent.

(To save a copy of the chart, click here.)