The S&P 500 Just Made a Bullish Crossover. Here's Why That Might Not Necessarily Mean a Big Rally Is Coming.

Key Points

• The S&P 500 recently made a very bullish "crossover," which has been known to precede to a strong rally.

• The last time a similar crossover took place was back in 2023, a year when the index rose by 24%.

• Investors, however, should consider the full context when analyzing chart trends.

• 10 stocks we like better than S&P 500 Index ›

The S&P 500 (SNPINDEX: ^GSPC) has been doing fairly well this year, and has recovered after the early Trump tariff news spooked investors back in April. It's back up around record levels, and recently made a very bullish crossover -- one that it hasn't made in two years.

When there's a big "crossover" in stock prices' moving averages for different time frames, that can be a very bullish sign to buy, according to technical analysts who rely on chart patterns. But that doesn't mean an investment or asset is guaranteed to rise in value after such a crossover. It's always important to consider context.

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Here's why you shouldn't get too excited about what might normally be a very positive indicator for the S&P 500.

Image source: Getty Images.

The S&P 500 makes a golden cross for the first time in 2 years

A "golden cross" occurs when a shorter-term moving average crosses above a longer-term moving average. On the flip side, when the opposite happens, that's referred to as a "death cross," and technical analysts consider it a very bad indicator.

Recently, the S&P 500's 50-day moving average crossed above its 200-day moving average, making a golden cross.

^SPX data by YCharts

A death cross did occur earlier this year when "reciprocal tariffs" were announced, but as you can see from the chart above, the S&P 500 has recovered in a relatively short fashion. The last time that a golden cross took place was back in early 2023, a year when the S&P 500 would go on to rally by more than 24%.

Why this doesn't mean stocks are due for big gains

Investing based on charts alone can be a dangerous strategy because they don't tell you the whole story, and it's important to understand what's going on in the markets, along with the relevant risks. Back in early 2023, when the last golden cross took place, the S&P 500 was coming off a brutal year in 2022 when it plunged by more than 19%. A golden cross then was a good sign that the market was recovering.

This time around, however, things are a bit different. If not for the "reciprocal tariffs" that were announced back in April, a death cross probably wouldn't have happened, and neither would this recent golden cross. This is where context is important in analyzing any chart trends. It's not as simple as assuming that because a golden cross has taken place, stocks are destined to go higher. Instead, it looks like the S&P 500 has effectively gotten back to where it was before the threat of tariffs derailed its progress.

I definitely wouldn't interpret this as a sign that stocks are likely to go on to major gains, not with the S&P 500 at record levels and with the threat and uncertainty around tariffs still hovering over the markets.

Investing in the S&P 500 is a good idea regardless of what charts tell you

The S&P 500 has historically risen in value over the long term, and that's the only real trend you need to worry about with the index.

In fact, the death cross that took place earlier this year highlights a significant weakness in relying on technical analysis and charts alone. By simply looking at the earlier chart back in April, you may not have expected a bearish crossover to suddenly take place. If, however, you were following market-related news and were aware that wide-scale tariffs were about to be put in place, you may have anticipated a significant pullback in the markets due to worsening investor sentiment.

Charts can be useful tools in assessing how a stock or asset is doing, but you shouldn't base your investing decision on what a trend may suggest is happening.

The good news, however, is that with a simple buy-and-hold strategy, you can ignore chart trends and just hang on for the long haul. This is where tracking the S&P 500 through exchange-traded funds can be an easy, no-nonsense way to grow your portfolio over the long term without having to worry about what's happening in the markets on a day-to-day basis.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.