A Bullish Sign in the “Golden Cross”?

In case you’ve missed it, technical analysts have been atwitter over sightings of the mystical-sounding “golden cross”. Among the latest observations from the mainstream business press are a Barron’s online article posted yesterday and a Bloomberg piece from last week, but recent talk of the fabled Crux Aurea dates back at least as far as early June, when the daily chart of the Nasdaq Composite Index showed the 50-day simple moving average crossing above the 200-day SMA. Since then the heavenly vision has appeared in the NYSE Composite (June 18), Russell 2000 and 3000 (June 19), and, just last Tuesday, in the S&P 500—perhaps among the reasons for last week’s devil-may-care rally.

Coverage of this augury has included some decent analysis, and Michael Stokes posted an excellent series of studies on the MarketSci blog. Our contribution to quantifying the phenomenon focuses on its value as a short- to intermediate-term signal rather than as a long-term trading system. The table below shows the stats for the S&P 500 one week, one month, three months and six months after a bullish 50-day/200-day moving average crossover:

Golden Cross Analysis

What’s stands out is that while there’s no significant edge in the very short term, on average it does pay to buy the Golden Cross if you book your profit in the one- to six-month timeframe. The percentage wins and average gain/loss ratio are particularly impressive after six months.

Lest one be lulled into complacency by these results, let us consider the period from 1928 through 1941. Based on a model of the S&P 500 for that time, five out of six 50/200-day crossover long entries ended up with losses six months later, with the largest loss (September 1939–March 1940) being more than 38%.

Despite the unusual severity of this economic downturn, it seems unlikely, given all the government intervention we’ve seen, that we’re going into another Great Depression— nevertheless, it might not hurt to accompany any long bets with a little protection, by using other, shorter-term indicators, stops or (relatively cheap, at the moment) puts.

–F.C.

Feature photo courtesy of Flickr user cmaccubbin under Creative Commons license.

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Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More

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