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Why the Golden Cross May Not Be Golden


Celebrations of the bear market's end may be premature.

Editors Note: This article has been excerpted from the latest Bull Market Timer Weekend Update, and is reproduced here for the benefit of the Minyanville community.

All last week, the media celebrated the Golden Cross in the S&P 500, which occurs when a fast-moving, short-term average (like the 50-day moving average) crosses above a slower-moving, long-term moving average (like the 200-day moving average).

The question now: Should market participants be heralding this cross as the start of a new bull market?

Before answering this question, it's imperative that we recognize what the inception of a new bull market means. Historically, bull markets have lasted for about 35 months, resulting in a 115% gain in the major market indexes.

There's a serious difference between bull markets and bear-market rallies. Bull markets go from strength to strength, are characterized by strong volume, broad positive breadth, and good institutional buying in the face of rising prices. A bear-market rally, on the other hand, can be used by nimble traders to make quick money on the long side; for most investors, however, it's a time to sell and build defensive positions in anticipation of a broad-based decline. Such a decline would eventually drive prices to levels at which a new bull market could be born.

Getting back to the Golden Cross discussion, let's talk about some other Golden Crosses that have occurred at the end of other severe bear markets.

Here's 2003:

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No positions in stocks mentioned.

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