When people talk about the stock market, they often refer to the S&P 500. There are thousands of stocks in addition to the 500 companies included in the index, but the S&P does serve as a pretty good proxy for the overall market.
It makes sense, therefore, to pay attention to what the major index is doing. I bring this up because the S&P 500 could be about to do something it hasn't done in over two years. Here's what that something is -- and what it means for investors.
Image source: Getty Images.
Crossing over
A moving average is the average price of a given asset over a set period of time. A "golden cross" is when a short-term moving average crosses above a long-term moving average. The most widely followed golden cross is when the 50-day moving average crosses above the 200-day moving average.
This golden cross is viewed by many investors as a strong bullish signal. It typically happens when the 200-day moving average has been declining for a while while the 50-day moving average has risen in recent weeks.
That's exactly what could be about to happen with the S&P 500. The index plunged 19.4% last year, something that it's done only seven times ever. This caused its 200-day moving average to steadily decline.
But the index began to rebound toward the end of 2022. Its momentum has continued this year. As a result, the 50-day moving average for the index has moved higher and is ever-so-close to crossing above the 200-day moving average. The last time this happened (in July 2020), the S&P 500 gained more than 50% before again falling.
What history shows
Should investors expect another big positive run for the S&P 500 if a golden cross occurs between the 50-day moving average and 200-day moving average? If we look at the historical performance of the index, the answer is...a definite maybe.
The previous golden cross before 2020 occurred on April 1, 2019. The S&P did move higher afterward but only by 16% before sinking in early 2020 due to the pandemic.
Rewinding the clock further, the S&P 500's golden cross before 2019 happened on April 25, 2016. The index went on to climb 39% before peaking in October 2018.
Historically, the S&P 500 does frequently generate strong double-digit-percentage gains after a golden cross between its 50-day moving average and 200-day moving average. However, that's not always the case.
For example, this type of golden cross occurred on May 22, 1978. The index subsequently rose by nearly 8% before plunging.
An even worse performance came in 1957. The S&P 500's 50-day moving average crossed above the 200-day moving average on June 4 of that year. Afterward, the index moved a little under 4% higher before sinking.
A different kind of "moving average" strategy
The golden cross for the S&P 500 that could be right around the corner is typically a bullish sign. But the main problem with using moving-average crossovers to decide when to buy stocks is the potential for false signals.
You could even lose money by buying and selling based on moving-average crossovers due to whipsaws where stocks quickly reverse direction after seeming to start a new up or down trend.
There is a different kind of "moving average" strategy that could make you more money and cause you less anxiety over the long run. And it's a simple one.
Just move your money into stocks or exchange-traded funds (ETFs) on a regular basis, such as monthly. This approach is called dollar-cost averaging. It lowers your average cost because you're buying when the stocks or ETFs are falling but keeps you invested when they're rising.
There's no guarantee that the S&P 500 will keep its momentum going even if it soon experiences a golden cross. But regularly investing in stocks and not selling too often will likely deliver strong returns over time.
