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Schwab: Technicals flash more market gains ahead

An unusual and mostly unnoticed confluence of two technical indicators suggests stocks are poised for more intermediate-term gains despite headlines out of Europe, new research shows.

Two weeks ago the S&P 500 flashed a so-called Golden Cross -- its first since August 2011 -- making the market's uptrend technically official. Less noticed is that the VIX (VIX) volatility index -- also known as the investor fear gauge -- experienced a Death Cross, writes Liz Ann Sonders, chief investment strategist at Charles Schwab (SCHW), in a new note to clients.

"It hasn't paid to fight the trend, and the trend remains up," Sonders says. "You can nitpick about low volume (partly reflecting less-active individual investors) or certain sentiment and technical faults, but the market has continued to defy the under-invested skeptics."

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A "Golden Cross" occurs when the market's 50-day moving average crosses above the 200-day moving average, which is a sign of building upside momentum, writes Sonders. A "Death Cross," meanwhile, occurs when the 50-day moving average crosses below the 200-day moving average, a sign of building downside momentum.

"In the case of the VIX, a Death Cross shows fading volatility, which is not only good for the market, but great for the investor psyche," Sonders says.

The VIX's Death Cross occurred on January 24 and the S&P 500's Golden Cross occurred on January 31, for a spread of only a week. Sonders looked back to see how often an S&P 500 Golden Cross occurred within a week or two of a VIX Death Cross -- and came up with only one instance since 1990.

"Although this was the closest the two crosses have ever occurred, there was a similar period in October 2010 when the crosses occurred within 14 days," Sonders says. "That was followed by stellar markets returns, with the S&P 500 up 8.5 percent three months later and more than 13 percent six months later."

With the three major indexes up 20 to 25 percent since early October, stocks are due for at least a short-term pause, note bullish strategists such as Bob Doll of BlackRock (BLK) and Raymond James' (RJF) Jeff Saut. But the technicals support gains for stocks -- hiccups and bouts of weakness notwithstanding.

"The run won't last forever, and it won't be straight up, but it could last longer than many think," Sonders says.

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