The stock market’s upcoming golden cross (AKA 50/200-day MA crossover) looks like it will be of the rarer variety: the downtrending cross.
Unfamiliar with the golden cross? Read our take on the strategy and its two flavors (SMA and EMA).
Because of the nature of how moving averages are calculated, the golden cross usually occurs in an uptrend, when prices are pushing both averages up, but pushing the 50-day average up faster (leading to the crossover).
But because of the length and severity of this bear market, this golden cross may occur over a 200-day moving average that is still very much in a downtrend. To illustrate, the graph below shows the S&P 500 with its 50-day (red) and 200-day (blue) MAs, since the current bear market began on 10/15/2007.
In this post, I want to look at how the golden crossover strategy has performed following one of these rarer downtrending crosses.
The graph below shows three competing golden cross strategies, applied to the S&P 500 index from 1960 to present (geek note: we’re using the SMA variation, not EMA).
[logarithmically-scaled]
The first (red) has been run straight – it trades every crossover. The second (green) doesn’t initiate the trade until both the 50 and 200-day MA are rising, but is otherwise straight. The third and most drastic (purple), never initiates a trade if the golden cross originally occurred in a downtrend, even if the 50 and 200-day MA eventually turn up.
Geek notes: these results are frictionless (i.e. do not account for transaction costs or slippage). I’ve included return on cash when not invested of half the nearest 13-week Treasury bill. Note that my previous test of MA crossovers assumed the full treasury yield (instead of half), so these results will be just a bit different.
And for the number lovers…
Clearly, variation three, which ignored downtrending golden crosses forever and always, has been a bust. Interestingly, variation two, which simply waited for the 50/200-day averages to turn up, slightly hurt performance.
It would seem that variation one, taking the crossover when it occurred regardless of the direction of the MAs, has been the most effective approach.
Having said all of that, the difference between variations #1 and #2 has been so small (only 129 trading days over nearly 50 years), that like the SMA vs EMA discussion, I don’t think it warrants getting too worked up over.
If the upcoming cross occurs over a downtrending 200-day MA, it deserves the same level of significance as any other.
[Edit: click for a summary of all posts in this series on trading the Golden Cross]
Happy Trading,
ms
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Filed under: Trading Strategies | 9 Comments
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My email: michael @ marketsci.com (remove spaces)
Hi Michael. One question: how do you mechanically define when the series are in an uptrend versus a downtrend? Thanks
RE to cordura21: for this particular discussion, it’s based on the 200-day SMA. SMA up = uptrend, SMA down = downtrend. Thanks, michael
Michael – Thanks for the excellent backtest. Maybe a few Buy & Holders will recognize the value of the preventing the big loss using the Golden Cross.
Looks like we have the cross over inplay today.
I thought that the golden cross rule uses the SPX weekly moving average, not the daily moving average.
RE to Ssnt: that is one of many, many variations, yes. You’d find the results similar to those here (assuming you’re comparing for example a 200-day SMA to a 40-week SMA). michael
Could you share the actual trades data with me I am interested in seeing the underlying data.