Last post on the subject of golden crosses (aka 50/200-day moving average crossovers). Unfamiliar with the golden cross? Read our take on the cross, about its two flavors (SMA and EMA) and crosses in up vs downtrending markets.
In our previous post we looked at trading the golden cross with and without confirmation by the Dow Jones Transportation Index (DJT). In that post we tested a strategy trading the Dow Jones Industrial Average (DJIA), because it was a nice match for the transport index.
But as I wrote in that post, I’m not a fan of trading the DJIA (it’s just too concentrated in too few names), so in this post we’ll rerun the same test trading the S&P 500 index.
[logarithmically-scaled]
The chart above shows the results of two strategies trading the S&P 500 from 1951 (blue) to present. The first (red) is the straight version, going long at today’s close if the 50-day SMA of the S&P 500 crossed above the 200-day today. The second (green) is looking for DJT confirmation – it will only go long if both the first condition is met AND the 50-day SMA of the DJT index is trading above its 200-day.
Geek notes: these results are frictionless (i.e. do not account for transaction costs or slippage), and I’ve included a return on cash when not invested of half the nearest 13-week Treasury bill.
And for the number lovers…
Same conclusion as the previous DJIA test: though performance wasn’t significantly improved, the benefit of requiring DJT confirmation has been a sizeable reduction in exposure (time in market).
And accomplishing (more or less) the same end goal with less exposure to the market is an inherently good thing because it reduces the risk of getting caught looking the wrong way on a massive unpredictable black-swan’ish day (a’la Oct. 1987).
What do these results say about this market?
The 50-day SMA of the S&P 500 closed over its 200-day SMA at Tuesday’s close (06/23), meaning by the traditional definition, the market is now bullish. Side note: the 200-day SMA is still falling, but as we showed here, that hasn’t historically been a negative.
But the 50-day SMA of the Dow Jones Transportation Index is still below its 200-day SMA, meaning, based on this test, this golden cross is not yet so bullish (rather, neutral).
What’s my take?
In short, I don’t have one – I don’t know what the broader trend is (and don’t really care all that much).
Readers know, I’m not a fan of trend-following – I think investors are much better suited using shorter-term more active strategies. This series has really been for the benefit of folks (a lot) less hyperactive than us.
[Edit: click for a summary of all posts in this series on trading the Golden Cross]
Happy Trading,
ms
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