Stock Portfolio Updates: Markets Have Stumbled After Golden Cross By: Christopher Mistal | February 09, 2023 | Email | Print

One week ago, today a Golden Cross occurred on S&P 500’s chart. A Golden Cross happens whenever the 50-day moving average crosses back above the 200-day moving average. Historically, Golden Crosses have been viewed as bullish as they typically only occur after a period of sustained positive momentum. The current S&P 500 Golden Cross occurred after it had rallied 16.8% from its October closing low to its February 2, close.

 

 

Based upon the last week of trading there are likely a few questions about Golden Crosses and just how bullish they really have been. To answer these questions, we dug into our database of S&P 500 data that has been extended back to 1930. We found 52 prior Golden Crosses and can confirm they are in fact bullish, but with a few caveats.

 

 

From 1930 to about 1950, when many of the years were plagued with economic depression and war, Golden Crosses were not all that reliable as bullish signals or confirmation of a bullish move. Many were followed by losses in the next week or 2, or some time over the next 3 months. From 1950 through 2020, Golden Crosses were generally followed by substantially above average gains and frequency when compared to all rolling periods. 3-months after a Golden Cross since 1950 proved to be the most bullish period with an average gain of 4.24% and advances occurring 75.0% of the time compared to all rolling 3-month periods of 1.80% and advances occurring 62.6% of the time.

 

The current Golden Cross combined with other indicators, seasonals and trends does strengthen the bullish case and improve the odds of continued gains for the remainder of the Best Months and the Sweet Spot of the 4-year cycle. But we still expect some chop and occasional volatility along the way as the market digests news headlines and incoming economic data.

 

 

Of the original 38 stocks selected for our annual Free Lunch basket back in December, 8 survived the volatility of late-December through the beginning of the year. As of the close on February 8, only two positions remained, Intrepid Potash (IPI) and Allot (ALLT). The other six were stopped out when they closed below their respective 8% trailing stops (closing prices). We will continue to hold IPI and ALLT with the same suggested 8% trailing stop.

 

As a reminder, Free Lunch stocks are not intended to be held for long. Should a sizable profit present itself, do not hesitate to lock it in. Also, small-cap outperformance has historically begun to wane in February (page 114, 2023 STA) as the bulk of the move from around mid-December has already occurred.

 

 

Over the last four weeks since last update through yesterday’s close (February 8), S&P 500 advanced 3.7% while Russell 2000 climbed 5.3%. Over the same period the entire portfolio advanced 1.6%, excluding dividends and any fees. Lagging healthcare and energy related positions combined with a sizable cash balance in the portfolio held overall performance in check compared to the major indexes. We are not targeting a specific level of cash in the portfolio, and we will be presenting additional new stock ideas in coming weeks. 

 

Weakness in healthcare positions appears to be a combination of waning pandemic spending and rotation out of last year’s winners back into higher growth tech names. This could continue for a while longer, but it will end. Demand for and spending on all things healthcare related continues to climb and despite all the talk about lowering prices for services in this sector, it rarely if ever seems to happen. CCRN, ELV and UNH can all be considered at or near current levels.

 

Generally mild winter weather and recession fears have kept energy demand and its prices subdued since they spiked to multi-year highs last year. If $70-80 per barrel is the low range for crude oil, then it could easily see a surge higher as spring and the summer driving season get underway in several weeks. Historically, crude oil and natural gas prices tend to make seasonal bottoms in February and rise until June or July. Both natural gas and crude appear to be in the process of bottoming. This suggests the next move for energy related positions will likely be higher. EPSN, SOI, MUR, and EOG can all be considered at or near current levels.

 

Outside of energy and healthcare, Digi International (DGII) and Fabrinet (FN) have also been struggling this year. Both were positive last year, significantly outperforming the broader indexes and are likely experiencing some profit taking this year. DGII did report better than anticipated earnings and revenues for its most recent quarter. FN also reported solid quarterly results that included profit margin expansion. DGII and FN can both be considered at or near current levels.

 

Except for Free Lunch positions, MGPI and T, all other positions in the portfolio can be considered on dips. Please see the table below for updated stop losses and buy limits. Buy limits are based upon closing prices from today, February 9. Positions that say “Buy Dips” can be considered at any price better than (lower) today’s close. Positions with “Buy Current” can be considered at up to 3% above today’s close.