S&P 500: Rally Mode or Dead Cat Bounce?

The markets had a nice rally this past week with the S&P 500 up 5.4%, it's best week since mid-July 2009, the Dow was up 5.3% and the NASDAQ rose 5%.  This comes as everyone is talking about the "dark cross" or the "death cross" where the 50 day moving average crosses below the 200 day moving average.

As you can see in the graph, the S&P is below the 50 and the 200 day moving average, the 50 day moving average is below the 200 day and the 200 day has turned down.  We mentioned this last week as something we were watching. 

Looking back, the "dark cross" has occurred 30 times since 1950.  The interesting thing is that 73% of the time if you simply had held the S&P 500 until it went back about the 50 day moving average you would have had a profit.  However, the other 27% which have resulted in losses, those losses have been relatively large.  The 2000 - 2003 cross saw the S&P fall -33% and the 2007 - 2009 cross saw it drop -40%.  How will this cross play out?  Will it be in the 73% of other crosses that saw a gain?  Or will it be another large loss like the remaining 27%?  Obviously only time will tell but you should be keeping all these facts in mind as you are running your investing plays. 

As we stated last week, we are waiting to see how things resolve themselves.  This past week we saw the S&P move back closer to its 50 day moving average which puts things in a nice position.  If it can continue higher, reclaiming both its 50 and 200 day MA, we would consider that a positive sign and become more bullish on equities.  If however it fails around its 50 day, that would be a continuation of the bearish trend.  We will wait, patiently, building a shopping list of things that have held up well, to buy should we get a go-ahead signal.  If not, we will stay nicely in cash and fixed income, or in a hedged position.