S&P’s Loud ‘Buy’ Signal Has Crummy Timing

The good news: The S&P 500 has just given us a major technical buy signal that has a ton of historical “street cred.”

The bad news: The signal couldn�t have come at a worse time for investor psyches.

Click to Enlarge That signal is the so-called “Golden Cross,” where a major index�s 50-day moving average line crosses above the 200-day moving average line. The premise of the Golden Cross theory is that such a crossover — where a relatively lengthy trend line moves above an even longer trend line — serves as undeniable proof that the major trend by that point is indeed a bullish one.

But let’s say you�re not impressed by all that technical mumbo jumbo, since stocks trade based on perceived values rather than chart-based events. Fair enough. Just know that the last eight Golden Crosses (which go back as far as 1998) have all successfully marked a rally that could have made investors some money by jumping in for at least a few months at the time the hint was dropped.

Just to reiterate, that�s 8-for-8. If the Golden Cross were a baseball player, he’d be a Silver Slugger.

But What About Valuation?

How can the market possibly be going higher when clearly all hope is lost for global economy? After all, Europe is slipping into a financial abyss, the American economy is shrinking at an uncontrollable rate and earnings stink … right?

No.

A funny thing happened on the way to Armageddon — we didn�t get there. Europe�s financial woes still aren�t fixed (they actually might be getting worse). Yet the sun still rises for every country in the European Union. In Q3, America�s corporate earnings reached record levels. The GDP growth rate has improved three consecutive quarters now.

It might not have been pretty, but it�s still all on the positive side. More than that, though, it�s getting tough to keep arguing stocks aren�t worth owning unless you�re willing to ignore a bunch of data.

Indeed, although the market�s P/E is a hair above multi-decade lows hit in the latter part of 2011, it’s still hovering at stunningly cheap levels. In fact, valuations for U.S. equities have now remained under their 50-year average for as long as they have since the early ’70s.

Sure, stocks can lose value in anticipation of an economic contraction. But after 446 days of subpar valuation, it�s time to start acknowledging the possibility that maybe — just maybe — we�re not headed off a cliff after all.

Before You Jump to Conclusions

Just to put these Golden Cross signals in perspective, this is 50 days worth of market value dancing with 200 days worth of market value. Yet the media is apt to induce the masses into thinking this Golden Cross is a “now or never” kind of clue. It�s not. In fact, odds are good the market�s overextended condition now is an open invitation for a little profit-taking.

Of course, any pullback at this point will be used as “obvious evidence that such technical signals are hogwash.” The problem is, three or four days of bearish movement doesn�t unwind a buy signal that took at least 50 days to develop.

Translation: Don�t confuse the short-term trend with the intermediate-term trend (even if the media doesn�t care to denote the difference).

The fact is, we saw several short-term dips within long-term rallies following the last eight Golden Crosses, and they ended with moves to even higher highs. There�s no reason to think any pullback from here has to be a quick end to this technical buy signal. So don�t get psyched out at the first sign of trouble here.

Bottom Line

The S&P 500�s Golden Cross occurred right at 1,256, versus Monday�s close of 1,312.80. So the index could fall back to 1,256 — a 4.3% dip — and the uptrend still would technically be intact. It doesn�t even need to give up that much ground to give us a good reset of the longer-term uptrend, though. We simply need to burn off a little of the excess froth we�ve added in the middle of January before resuming the bigger-picture uptrend that�s just been confirmed by the 50-day average�s cross above the 200-day moving average line. A slide to the 1,280 could do the trick.

Either way, this crossover signal has been too good to dismiss now, whether you�re a believer in technical analysis or not. The funny thing is, the market�s actually justifying stronger price levels for the long haul.