Wall Street is getting excited: The Standard & Poor's 500 index (SPX) is approaching a "Golden Cross," the technical indicator for when the index's 50-day moving average crosses above its 200-day moving average.
This is typically seen as a bullish signal. It is thought to be a significantly favorable turning point, especially if the trend is confirmed by higher trading volume.
Unfortunately, the S&P 500 is not currently experiencing strong trading volume, so investors are feeling unusually cautious about it.
Their initial excitement for the indicator is understandable: In the past 50 years, according to data compiled by Birinyi Associates, a golden cross on the S&P 500 has proceeded further gains six months ahead in eight out of 10 times. The average gain has been 6.6%.
"The gains, as expected, would not be in a straight line. But any weakness could be used by long-term investors as buying opportunities," reports Reuters.
Maybe, maybe not
There are still many things that can go wrong and reverse this otherwise glorious 2012 rally. (Sidenote, the opposite of the Golden Cross, when the 50-day moving average crosses below the 200-day moving average, is called a "Death Cross." This is a serious signal of a downtrend.)
Consider that things aren't really that much better than they were in 2011. As Reuters describes it, "the economy is getting better, but not dramatically. Earnings are beating expectations, but at a lower rate than in recent quarters. Nothing too bad is coming out of Europe's debt crisis -- and nothing good, either -- at least not yet."
Overall, the slight increase in circumstances and happy thoughts has the power to bring up the market, but one bad play from Europe, for example, could bring the whole thing tumbling down.
And perhaps more importantly, low trading volume make some doubt that the gains are sustainable to begin with.
Business section: Investing ideas
To help you explore investing ideas linked to the golden cross signal, we started with a universe of companies that have seen their 50-day SMA cross above the 200-day SMA during recent sessions.
In addition, all of these companies are more profitable than their competitors, based on gross and net profit margins.
These outbreak stocks have a track record of being more profitable than their competitors -- does that make their rallies more sustainable?
List sorted by market cap. (Click here to access free, interactive tools to analyze these ideas.)
1. Caterpillar (NYSE: CAT): Caterpillar manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. SMA50 at 95.51 vs. SMA200 at 94.81 (current price at 110.41). TTM gross margin at 32.24% vs. industry average at 32.06%. TTM operating margin at 15.85% vs. industry average at 12.95%. TTM pre-tax margin at 11.14% vs. industry average at 11%.
2. Deere & Company: Provides products and services primarily for agriculture and forestry worldwide. SMA50 at 79.10 vs. SMA200 at 78.66 (current price at 87.41). TTM gross margin at 32.15% vs. industry average at 32.06%. TTM operating margin at 15.56% vs. industry average at 12.95%. TTM pre-tax margin at 13.22% vs. industry average at 11%.
3. National Oilwell Varco (NYSE: NOV): Designs, constructs, manufactures, and sells systems, components, and products used in oil and gas drilling and production; provides oilfield services and supplies; and distributes products, and provides supply chain integration services to the upstream oil and gas industry worldwide. SMA50 at 70.38 vs. SMA200 at 69.53 (current price at 75.45). TTM gross margin at 35.17% vs. industry average at 34.86%. TTM operating margin at 20.08% vs. industry average at 18.18%. TTM pre-tax margin at 19.91% vs. industry average at 16.17%.
4. AFLAC (NYSE: AFL): Provides supplemental health and life insurance. SMA50 at 43.57 vs. SMA200 at 43.29 (current price at 48.41). TTM gross margin at 14.02% vs. industry average at 14%. TTM operating margin at 14.02% vs. industry average at 11.12%. TTM pre-tax margin at 13.15% vs. industry average at 9.76%.
5. T. Rowe Price: T. Rowe Price Group, is a publicly owned asset management holding company. SMA50 at 56.57 vs. SMA200 at 55.68 (current price at 58.25). TTM gross margin at 47.15% vs. industry average at 46.2%. TTM operating margin at 44.61% vs. industry average at 35.17%. TTM pre-tax margin at 45.57% vs. industry average at 24.34%.
6. Analog Devices (NYSE: ADI): Engages in the design, manufacture, and marketing of analog, mixed-signal, and digital signal processing integrated circuits used in industrial, communication, computer, and consumer applications. SMA50 at 35.89 vs. SMA200 at 35.75 (current price at 39.08). TTM gross margin at 70.32% vs. industry average at 59.78%. TTM operating margin at 35.9% vs. industry average at 23.99%. TTM pre-tax margin at 35.46% vs. industry average at 22.91%.
7. KeyCorp: Operates as a holding company for KeyBank National Association that provides various banking services in the United States. SMA50 at 7.56 vs. SMA200 at 7.45 (current price at 7.85). TTM gross margin at 88.03% vs. industry average at 71.3%. TTM operating margin at 41.56% vs. industry average at 40.62%. TTM pre-tax margin at 28.64% vs. industry average at 22.28%.
8. CNA Financial: Provides property and casualty insurance products to small, middle-market, and large businesses and organizations primarily in the United States, Europe, Canada, and Hawaii. SMA50 at 26.51 vs. SMA200 at 26.48 (current price at 27.54). TTM gross margin at 15.32% vs. industry average at 14%. TTM operating margin at 14.46% vs. industry average at 11.12%. TTM pre-tax margin at 12.38% vs. industry average at 9.76%.
9. Helmerich & Payne: Engages in the contract drilling of oil and gas wells in the United States and internationally. SMA50 at 58.21 vs. SMA200 at 57.94 (current price at 60.33). TTM gross margin at 43.68% vs. industry average at 34.45%. TTM operating margin at 27.07% vs. industry average at 18.27%. TTM pre-tax margin at 27.01% vs. industry average at 16.27%.
10. Flowserve (NYSE: FLS): Develops, manufactures, and sells precision engineered flow control equipment. SMA50 at 101.11 vs. SMA200 at 100.39 (current price at 108.75). TTM gross margin at 36.24% vs. industry average at 32.06%. TTM operating margin at 13.32% vs. industry average at 12.95%. TTM pre-tax margin at 12.78% vs. industry average at 11%
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
List compiled by Eben Esterhuizen, CFA. Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. Profitability data sourced from Fidelity, all other data sourced from Finviz.
