Right now the future of stocks is caught between the good reasons for being optimistic about the USA’s outlook and the fear the European Union will come up with a crazy decision or a shocking economic figure that could derail the building positivity.
However, there could be something better than a silver lining inside this dark cloud that hangs over our stocks and it’s called a golden cross!
Now, this kind of lingo is the domain of those that live in the technical world of charts and predictive wriggly lines.
Chris Johnson of the Johnson Research Group was interviewed on CNBC recently and he explained that a golden cross event was looming with the S&P 500 index. This is a very bullish sign and one that has a nice strike rate for those in the prediction or forecasting caper.
The golden cross
A golden cross happens when the 50-day moving average crosses over the 200-day moving average to the high side. This action has the impact of dragging up the 200-day moving action and history says when this happens markets go into positive territory.
Johnson says you can expect something like a 6% increase over six months and the positive correlation of golden crosses leading to good times for stocks is in the order of 80-90%.
So it is interesting that this emerges at a time when the positives from the US economy and company reporting are battling the negatives from Europe.
If the US was still battling the false claims by experts that it would be heading into a double dip recession, and you then threw in the uncertainty that is Europe, I could have easily argued that a golden cross lift could be a long shot. However, provided we don’t get a big and unplayable curve ball from the EU, we’ve got a reasonable chance of seeing a golden period for stocks.
Johnson says he expects the cross to happen in the next three to four weeks and if it happens it will spark confidence resulting in a lot of money parked on the sidelines in cash to come back to stocks.
For the historians, a golden cross of this kind has happened 21 times since 1970, according to Johnson.
I would suggest there are a host of factors that could determine whether the cross turns up and if it can have a solid impact on stock prices. These would include:
- How US company reporting goes over the next few weeks, especially the banks this week.
- The impact of the S&P downgrades for nine eurozone countries, including France.
- Whether or not the eurozone moves into recession and how bad it would be. S&P says there is a 40% chance of eurozone gross domestic product (GDP) contracting by 1.5%.
- The calibre of EU negotiations about managing debt and deficits.
- The fear that fiscal responsibility will weaken demand further and worsen any upcoming recession.
- The bond auctions for these countries (which improved last week).
- Whether Greece defaults, creates contagion and dumps the euro.
Of course, I could go on and even focus on the positives, but the real challenges are potential negatives that could tarnish the glitter of this looming golden cross.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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