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Net Net: Promoting innovation and managing change

Golden Cross Pushes One Index Into All Stocks


The Golden Cross has just gone turbo-charged.

Ian Cumming | Axiom | Getty Images

While the popular market sign is often considered a strongly bullish stock benchmark, a rebalancing under the algorithm used for the Dow Jones Golden Crossover U.S. Large Cap Index represents a full-bore risk-on trade.

The index will go to a 100 percent stocks allocation over the next four days, according to a release from the parent company.

"This simply indicates it's a favorable time to be taking on equity risk," says David Krein, senior director of product development and analytics at Dow Jones Indexes. "It's really intended to serve as a thoughtful risk measure for investors that might otherwise be in all equities, all the time."

The move comes due to the technical indicator of a Golden Cross, which happens when the 50-day moving average crosses above its 200-day counterpart.

Under normal circumstances, the Dow Jones index hedges its equity exposure with a 75 percent allocation to Treasury bills. But over the next four days the index will phase out all its fixed-income holdings and go completely to stocks.

Krein says the move is representative of a total risk-on trade in stocks, adding that the index has had a good track record as a leading market indicator.

Such a move can be indicative, though, that things are getting carried away and a top is near. Market capitulation usually occurs when sentiment gets overdone in one direction, and an index in such an aggressive equity position is but the latest in a recent series of extremely bullish indicators.

The Dow’s critical trend lines converged on Jan. 31.

While the Cross can be an unreliable and even contrarian sign at times, the blue-chip average has risen about 2 percent since, due in large part to Thursday’s rally. Dow Jones also points out that the index has outperformed the large-cap benchmark by 3.85 percentage points since Dec. 31, 1999.

Still, a triple-top in the Dow transportsand a seemingly endless stream of bullish strategist calls should be ample warnings signs for a correction.

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