Another Momentum Indicator Signals Outsized Stock Market Gains

Another Momentum Indicator Signals Outsized Stock Market Gains

• The S&P 500’s 50-day moving average recently broke above the 200-day.
• Similar instances have happened 11 other times since 2000.
• The stock market averaged a 15% 12-month return in those instances.

Last week I highlighted an important shift for investing momentum. The S&P 500 Index’s 200-day moving average had recently started to make new highs. This was an important switch because it tells us the long-term stock market is turning positive once more.

You see, in early March of this year, the index fell below the 200-day. That was in anticipation of the White House’s April 2 tariff announcement. The shift led to more selling momentum. But then, after the harsh trade rhetoric was walked back, the stock market broke back above its long-term moving average in mid-May. That change acted as a catalyst for stocks to rally even more.

As momentum built, the 200-day moving average bottomed out and began to rebound. In early May it started making closes above the prior day’s price. And, by the end of the month, the long-term average started making new highs. Ever since, as the stock market has kept rallying, the upward momentum keeps building.

As I highlighted at the time, the change bodes very well for future stock market returns. According to a total return analysis (dividends reinvested) of the eight times this has happened since 2000, the S&P 500 has averaged a 22% return over the following 12 months and a 39% gain over the following two years, with a 100% success rate.

Well, following this past Tuesday’s close, another important momentum signal was triggered. The index’s 50-day moving average (short term) closed above the 200 day. And based on what history tells us, this indicator also points to outsized returns for the S&P 500.

But don’t take my word for it, let’s look at what the data’s telling us…

As I established last week, I like to watch the S&P 500 because it’s viewed as the primary benchmark for U.S. stocks. And since I take a long-term view on investing, I prefer the 200-day moving average—it takes a sharp move in either direction to trigger a meaningful change.

However, I also like to keep an eye on the direction of the 50-day moving average relative to the 200-day. When the short-term gauge (50-day) breaks below the long-term average (200-day), it’s a caution sign for me. Those are moments when I must decide whether something has changed fundamentally, leading to a longer-lived selloff, or the downside momentum has gotten ahead of itself, and the market is oversold. Conversely, a breakout above the 200-day (golden cross) has typically been a key buying signal.

In the past cycle, the momentum broke down not long after the White House rolled out its tariff plans. Yet, once the administration’s tone began to change, and the initially harsh tariff rhetoric was dialed back, I had more confidence that the selloff was overdone.

Once the 50-day closed above the 200-day, I reviewed all similar instances since 2000. The chart below shows how the moving average interacted since 2018 to make the changes more obvious. Notice the crosses and consequent stock market rallies in 2020 and 2023…

I identified 11 cases since 2000 when the 50-day broke above the 200-day moving average. They were May 2003, November 2004, September 2006, June 2009, October 2010, January 2012, December 2015, April 2016, April 2019, July 2020, and February 2023.

The results speak for themselves…

Using the date when the moving average breakout happened, I tracked the S&P 500’s total returns—including dividends—for the 3-, 6-, 12-, and 24-month periods that followed. I then calculated the average returns and success rate—how often returns were positive.

The outcome is compelling: after one year, the average return was 15%, and over two years it averaged 16% annually. Not bad, considering the S&P 500’s long-term average annual gain sits around 9.5%. And the success rate was nearly flawless.

So, as I said at the start, it’s time to take notice of a key trend shift. This one stands out. And based on past precedent, the S&P 500 should see healthy gains over the coming year.

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