BEHIND THE MONEY: Bow Down To The 'Golden Cross' and Buy
It sounds like something out of "Monty Python and the Holy Grail," but it is actually a technical analysis indicator with a stellar track record.
The Golden Cross, when the 50-day moving average for a security crosses above the 200-day moving average, occurred to the S&P 500 on Tuesday. FM trader Tim Seymour mentioned this on the show last night and said that it is "one thing to watch and part of an overall bullish recipe for July." Seymour notes that this special signal has also confirmed upward trends with copper and a few other resources.
"When associated with recessions, Golden Crosses show higher returns three, six and 12 months out of 7.4 percent, 8.3 percent, and 19.2 percent respectively," wrote Mary Ann Bartels, a great technical analyst for Bank of America Merrill Lynch , in a note this morning to clients. Her conclusion is that "the equity market remains in a base-building process that should lead to higher returns."
What is the batting average for the Golden Cross? Bartels found that during recessionary periods, the signal preceded positive 12-month returns a remarkable 93 percent of the time since 1932.
In simple terms, think of it as measuring a seismic shift in supply and demand. In a recession, the signal confirms a gradually changing attitude where demand for stock starts to outweigh supply because investors begin to sense a recovery is on the horizon.
Next week, we'll explore the "Killer Rabbit" signal that just hit.
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