Why a Golden Cross on the Dow Might Not Be a Good Thing

A popular technical chart pattern is the golden cross. This happens when the faster moving 50-day moving average (MA) crosses above the slower moving 200-day MA. The consensus is that a golden cross is a bullish development, as the name would suggest. The flip side is when the 50-day MA crosses beneath the 200-day MA, which is known as a death cross. Not surprisingly, this is viewed by market participants as a bearish omen.

We bring this up today because the Dow is very close to completing a golden cross. With the first close above 18,000 since July 2015, we are seeing definite improvement for the 120-year old index. Now, here’s the bad news: The last time the Dow had a golden cross was December 23, 2015—and it dropped nearly 10% over the next month.
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This raises the question, is a golden cross really a good sign? Since 1990, there have been 23 golden crosses for the Dow, and the return 1 month later is actually -0.6%, while the returns 3, 6, and 12 months later are all weaker than average as well.
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We will hear a lot about how bullish the pending Dow golden cross is after it happens. However, the historical evidence would suggest this isn’t the positive sign it appears to be. As we noted in this week’s Weekly Market Commentary, “Taking Stock After the Rally,” we still expect mid-single-digit gains for stocks in 2016,* but there are still several risks preventing us from becoming more aggressive. We expect modest gains (with a good deal of potential volatility) for the rest of this year, which would be in-line with a Dow golden cross.

IMPORTANT DISCLOSURES
*Historically since WWII, the average annual gain on stocks has been 7-9%. Thus, our forecast is roughly in-line with average stock market growth. We forecast a mid-single digit gain, including dividends, for U.S. stocks in 2016 as measured by the S&P 500. This gain is derived from earnings per share (EPS) for S&P 500 companies assuming mid-to-high-single-digit earnings gains, and a largely stable price-to-earnings ratio. Earnings gains are supported by our expectation of improved global economic growth and stable profit margins in 2016.

Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

Stock investing involves risk including loss of principal.

The Dow Jones Industrial Average Index is comprised of U.S.-listed stocks of companies that produce other (non-transportation and non-utility) goods and services. The Dow Jones industrial averages are maintained by editors of The Wall Street Journal. While the stock selection process is somewhat subjective, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth, is of interest to a large number of investors, and accurately represents the market sectors covered by the average. The Dow Jones averages are unique in that they are price weighted; therefore, their component weightings are affected only by changes in the stocks’ prices.

Technical analysis is a methodology for evaluating securities based on statistics generated by market activity, such as past prices, volume and momentum, and is not intended to be used as the sole mechanism for trading decisions. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends. Technical analysis carries inherent risk, chief amongst which is that past performance is not indicative of future results. Technical analysis should be used in conjunction with fundamental analysis within the decision making process and shall include but not be limited to the following considerations: investment thesis, suitability, expected time horizon, and operational factors, such as trading costs are examples.

This research material has been prepared by LPL Financial LLC.

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