SPX & The Golden Cross

For those that watch the market with a “technician’s eye” something unusual happened yesterday. It marked the first time since January 31, 2012 when the 50 day moving average on the SPX Index crossed over its 200 day moving average. Technical types call this “The Golden Cross”, which is almost unequivocally considered a bullish formation (especially in concert with increasing volume).

To be fair, in order to set up a Golden Cross, it must be preceded by a “Death Cross” which we saw in late August of this year following the China devaluation and Emerging Market/Currency volatility. The last time the SPX set up a Golden Cross came on the heels of the summer selloff of 2011 during the “PIIGS” tumult and U.S. Debt downgrade.

In the chart below, you can see both the Death Cross and yesterday’s Golden Cross.

OptionsHubImage

Chart: LiveVol Pro

If the past is any barometer – let’s see what happened last time…….

In 2012, the favorable technical condition occurred 15 weeks after the SPX bottomed. This year, the Golden Cross happened 16 weeks after the Index put in a low print.

In late January of 2012, the SPX traded around 1314 and the VIX was 19.40. The Index rallied fairly steadily for the next 9 weeks into early April, gaining 7.6%. Over the same time frame the VIX fell to about 15 and made multiyear lows (13.66 along the way). The SPX put in an interim top in early April of 2012 (highest levels since May of 2008). At that point, the broad market became concerned with Europe again (Hollande in France and Tsipras in Greece with anti-austerity campaigns). The SPX fell exactly 10% over the next two months while the VIX moved back to 28.

If the SPX were to mimic the 2012 behavior exactly, which is highly unlikely – the SPX would rally to about 2195 in the coming months (and then fall to about 1975).

Interestingly, there has been noteworthy upside call buying in the SPY today. Specifically, the Jan 22, 2016 expiration cycle 217 calls (>5 delta options) traded 160k times today. The open interest coming into the session was 186. The bulk of the volume traded (119k) on an average of 7.56 cents meaning someone bought nearly $1,000,000 in 1 month upside SPY premium. It will be worth watching how the trade plays out.