Editor's note: Our offices will be closed tomorrow ahead of Christmas. We'll pick up with our regular DailyWealth publishing schedule on Monday, December 26. Until then, we hope you enjoy the holiday! Don't Get Fooled by This Popular Bull Trap By Sean Michael Cummings, analyst, True Wealth Many analysts think it's the strongest bullish signal... It suggests the bottom is in. It promises rallying prices and improving sentiment. And it has appeared before every major bull market in history. The indicator I'm talking about is the "golden cross." This signal appears when an asset's short-term price average overtakes its long-term price average. And we just saw one in a major index... This week, the Dow Jones Industrial Average completed a golden cross for the first time since August 2020. That's a green light for bulls. Many investors will pour into long positions based on it. They might be disappointed, though... In fact, 70 years of history suggests they're heading into a trap. Let me explain... The Dow staged a big rally this quarter. After bottoming in September, the benchmark index has soared 12%. That's a big improvement on the S&P 500 Index's 5% rally... and the Nasdaq's 2% drawdown. Take a look... The Dow is surging compared with other indexes. And now, that short-term rally has produced a "golden cross." We can see the cross by looking at the Dow's 50-day and 200-day moving averages (50-DMA and 200-DMA). These indicators smooth out random day-to-day movements by tracking the average closing price over a certain time frame. Simply put, the 50-DMA shows the average price over the last 50 days. It gives us the short-term trend for the index. And the 200-DMA shows the average price over the last 200 days. It shows the long-term trend. When the 50-DMA climbs faster than the 200-DMA, it means a short-term rally is on... And when the 50-DMA overtakes the 200-DMA to the upside, it forms a golden cross. That's what just happened in the Dow. Take a look... For many investors, this signal is the moment when a bull market becomes sustainable. But don't be fooled by its popularity. The truth is a little murkier... The Dow has formed 49 golden crosses since 1950. I tested each of these signals to find out how stocks performed on average after they appeared. The results were surprising. See for yourself... The Dow has returned about 7% a year since 1950. But buying the index after golden crosses actually harmed returns. These cases led to gains of just 1% in three months, 3% in six months, and 5% in the following year. And 29% of the time, stocks actually ended the year negative after the golden cross appeared. Folks tend to see the golden cross as an investing shortcut. But investing with shortcuts is dangerous... You shouldn't go long based on this indicator alone. The only way to succeed in the markets is through patience, discipline, and research. So instead of buying this bull trap, take it as another data point to add to your arsenal... And keep your eye on the whole picture. Good investing, Sean Michael Cummings Further Reading "The markets are filled with false financial idols," Dr. David Eifrig writes. The consensus is often wrong. That's especially true of these three dangerous investment "strategies"... Learn how to avoid them right here. "We're nearing the end of this downturn," Marc Chaikin says. But even if the worst is over, the overall trend isn't with us yet. That means we're in a unique moment in time – and investors need to watch carefully while it lasts... Read more here. |
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