The False Promise of a “Golden Cross”?
Is one of the market’s most celebrated occurrences a head fake?
That’s what many professional investors are pondering right now.
Many of us realize that market sentiment is often built on shifting sands. Narratives can change quickly, leading to a rapid repricing across the board.
This is what’s unfolding before our eyes as the idea of a “Fed pause” has given way to a “Fed rate reset.”
From First to Worst
Stocks ended January with their best start to a year since 2019.
But apparently drunk on those high returns, equities have careened off course.
And Tuesday was the worst day of 2023 for investors.
Each of the major U.S. indexes collapsed at least 2%.
The Nasdaq and the Russell 2000 closed at their lowest levels since January 30.
The S&P 500 ended the day below 4,000 for the first time since January 20.
And the Dow Jones Industrial Average finished the session at its lowest level since January 19.
It’s not a comforting scenario for bulls as January’s rally has stalled in February.
But this shouldn’t be too much of a surprise to First Bar readers. Last week I warned there was potential for more downside ahead. And I stated, if 4,030 didn’t hold on the S&P, we could easily see 3,900.
The index closed yesterday at 3,997.34. We’re even lower today.
And since its peak on February 2, the S&P has lost 4.7% of its value.
Well, now what?
Are we headed for one of those loveable 5% corrections? Obviously, that would be the best-case scenario since we’re almost there.
Or are we in store for something more severe?
Well, here’s my take …
The False Promise of a “Golden Cross”
We saw a “golden cross” (the orange ball and arrow on the chart) on the S&P on February 2 …
This is one of the most prized bullish occurrences in the markets. It happens when the 50-day moving average (50DMA) – in green - crosses above the 200-day moving average (200DMA) – in gold.
When this happens, investors often expect stocks to go up, up, up!
But, if you’ve followed my analysis over the years, you know that I’m a contrarian. And I tend to view the “golden cross” as a near-term bearish indicator.
Why?
Well, the momentum needed to push the short-term 50DMA to cross above the 200DMA begins well before the cross actually takes place.
Just take a look …
The red line on the chart marks the December low.
From that low to the S&P’s peak on February 2, the index gained 11.5%.
And if we go back to the S&P’s October 13 low (the yellow line on the chart) - when momentum really started to shift - the index gained more than 20%.
Those sprints require a moment for the markets to catch their breath.
So, what ends up happening is the “golden cross” serves as a warning of a near-term peak.
That’s exactly what we’re seeing play out.
We’ve now punched through February’s low on the S&P.
Our next important levels are the 50DMA. For bulls, you don’t want to see the index fall below this level. Or the 200DMA, that’s the “red alert” level at 3,940.
If those are breached, then we could be well on our way to below 3,800 to the lows of January and December.
Investors cheered the “golden cross” on February 2. But it’s been a near-term head fake since then. For bears, they’re getting fat on the shift in sentiment as the bulls’ horns are dulled.
Staying a bar ahead,
Matthew
Morning Movers:
Palo Alto Networks (PANW) – Shares are up 10.9% on strong earnings that easily topped the consensus. As I outlined yesterday, the expected move on earnings was +/-6.5%. And shares have gained on seven straight quarterly reports. Though they’ve split the last two fourth quarter reports, averaging a one-day loss of 0.73%.
STAAR Surgical (STAA) – Shares are down 8.5% as sales came up short. I outlined yesterday that the expected move on earnings was +/-13.8%. Though shares have risen an average of 5.46% on its last two fourth quarter earnings releases… but it’s been a split, one up/one down.
Baidu (BIDU) – After jumping nearly 8% as profits beat and a new $5 billion buyback program was announced, shares are down 3.5%. The expected move on earnings was +/-6.4%. Though shares had split the last two fourth quarter reports, averaging a one-day gain of 1.68%.
What to Watch:
It’s only a four-day week, but there are more than 1,000 companies scheduled to report earnings.
Wednesday Earnings After the Closing Bell:
Nvidia (NVDA) – expected move on earnings +/-6.6%. Wall Street expects to see revenue drop 21% to $6.01 billion with earnings of $0.81 per share. Shares have tumbled an average of 7.89% on the last two fourth quarter reports.
Etsy (ETSY) – expected move on earnings +/-9.5%. Analysts are looking for $751.26 million in revenue with earnings of $0.80 per share. Shares have surged an average of 13.85% on its last two fourth quarter earnings releases. Even better, they’ve jumped more than 11.4% on five consecutive fourth quarter reports.
2:00 PM ET – FOMC minutes from February 1 meeting released.
5:30 PM ET – New York Fed John Williams speaks.
Thursday Earnings Before the Market Opens:
Alibaba (BABA) – expected move on earnings +/-5.6%. Wall Street wants to see revenue of $35.65 billion with earnings of $2.36 per share. Shares have slipped an average of 2.29% on the last two fiscal year third quarter earnings reports.
Vipshop Holdings (VIPS) – expected move on earnings +/-10.8%. Analysts are looking for $4.59 billion in revenue with earnings of $0.47 per share. Shares have risen three consecutive earnings reports. They’ve split the last two fourth quarter reports, falling an average of 2.78%. But since 2012, shares of Vipshop have only fallen on fourth quarter earnings three times, averaging a one-day pop of 6.74% during that span.
Moderna (MRNA) – expected move on earnings +/-6.4%. Analysts are expecting revenue to decline 30.4% to $5.02 billion with earnings of $4.68 per share. Shares have risen an average of 8.79% on the last two fourth quarter earnings reports.
8:30 AM ET – Initial jobless claims (est. 197,000)
10:30 AM ET – Atlanta Fed Raphael Bostic speaks.
2:00 PM ET – San Francisco Fed Mary Daly speaks.
© 2023 Matthew Carr
All rights reserved.
This market commentary is opinion and for entertainment purposes only. The views and insights shared by the author are based on his many years of experience covering the markets. But nothing in this email should be considered personalized investment advice. Investments should be made after consulting your financial advisor and after reviewing the financial statements of the company or companies in question.