GOLDEN CROSS OR FOOL’S GOLD? UPDATED….
Much has been said in recent days about the “golden cross” occurring in the major indices. Investopedia defines a golden cross as follows:
A crossover involving a security’s short-term moving average (such as 15-day moving average) breaking above its long-term moving average (such as 50-day moving average) or resistance level.
As you can see, following the inverse of this simple strategy (called the death cross) kept you out of the majority of the declines that occurred in 2008. History has also shown that the bullish scenario or golden cross (a downward sloping 200 DMA and upward sloping 50 DMA) yields pretty good results. According to Laszlo Biriyni there have been 12 golden cross formations since 1945. In 11 of those instances the stock market was up an average of 19% one year later. Vincent Delisle of Scotia Capital strategist goes a step further. He notes that of the prior 14 S&P 500 rebounds that lasted at least 49 months and returned 150% just over 17% of the total returns came before the golden cross occurred. This bodes well for bulls who are wary about buying into the rally after such a sharp 4 month move. He also notes that the average returns during these instances was 23% oe year after a successfull cross occurred.
I am always skeptical of charts that aren’t backed up by fundamental analysis. After all, it is the future earnings and economic fundamentals that will decide where stock prices go – not lines on a chart, but these numbers are pretty convincing….Thoughts and comments are always welcome.
Updated – Reader “MA” provides this excellent piece of research on golden crosses. The results are very good. 93% of golden crosses associated with recessions preceded positive 12 month returns with an average return of 19.2%.
seems like a simple timing tool for long term conservative investors. the pros? good tool when the market is in a long term up or down trend. the cons? will get whipsawed if in a trading/consolidation range. also on a major trend reversal, will miss out on the big moves from the top or bottom (like the early March bottom.) That’s what moving averages are…it’s mean aversion tool.
Another useless charting tool for people who are too stupid to read a balance sheet.
Depends entirely on your timeframe….
SS – balance sheets arent worth the paper they are printed on these days nor is TA with all the JPM/GS/Bernanke crap going on. Don’t discount the power of TA.
Ackman, great question. I would come to the same conclusion. Any charting theory that is not backed by substantial market participation, ie, volume, can be deemed as questionable at best.
I should also note that the one thing that makes me most skeptical of this data is the TYPE of recession we are currently in. This is a deleveraging cycle – a very rare beast. A balance sheet recession as some call it. Applying typical recessionary data to this cycle is like comparing how aspirin treats a migraine and how it treats a stroke. The deleveraging cycle is such a severe kind of recession and we’re unlikely to experience the same kind of recoveries that most investors are accustomed to. Of course, that doesn’t mean we can’t rally further. I continue to think you have to trade this market. The 1930′s data in the Merrill report is inconclusive at best and downright bearish in many cases. Food for thought. Take each data point as its own data point rather than trying to apply the same medicine to every disease….
Dean,
It’s always about how much trickles down to the bottom line. The way things are shaping up I will probably go long into earnings….We’ll see. Expectations appear very low to me.
Prescient, you and I both know you’re all over the deleveraging cycle….
@SS & Shanky –
Interesting debate brewing here…while by education/study i am a fundamentalist and believe technicals ultimately follow a path provided by fundamentals, in this two year bear I have seen enough “spurious” instances to conclude that markets certainly abide to rules of technicals.
It is amazing to me how much at odds fundamentals & technicals are currently….technically a bullish signal no doubt. But if the market is front running on higher earnings (and lower future P/Es) I have a difficult time reconciling earnings growth when 70% of GDPs composition (consumer) is limping along. Really, the question is how fast can we “distibute” government credit to consumers to leverage housing and go spend @ strip malls and coffee stores to allow credit based earnings streams (& P/Es) to come back to a normalized ratio. But i see no reason to chase performance in this environment. Another words, while a crossover is bullish, another technical is that markets usually double bottom, and I do not believe we have “tested”. Sorry for long winded, but all this indicates to me that money is being drawn to markets just in time for bear attack back to lows (retest). my 0.5 cent.
I’m waiting for single digit P/Es and/or successful retest of March lows…until then…
FWIW, if you wanted to use that S&P chart, the momentum looks toppy.
Looking forward, don’t you have to assume earnings are turning sustainably up to buy (or even hold) at this point? How many S&P500 companies qualify today as a buy on that basis?
The data in the Merrill Lynch report is pretty damn convincing. If you’re not a believer in charting just read the data.
Perhaps a rebuttal?
http://www.trivisonno.com/vix-up-to-trix
Dean,
If you like that you should check this out: http://vixandmore.blogspot.com/2009/06/vixvxv-ratio-sellshort-signal.html
TPC,
Nice to see that you’re responsive to comments. And nice post.
My QID position is till underwater, not much, but still. I thought I could at least get a few points on it. It’s a precarious moment, though some longs of mine are doing well.
Thanks TCP.
I will leave this up to your interpretation (ala Nenner’s cycle predictions. I don’t know what to make of this):
http://markettimingcycles.wordpress.com/category/weekly-preview/
P.S. Look at the Fibonacci sequence.
Any cross-referencing of the past golden cross occurrences with volume data? The volume decline since April seems a valid question to this rally’s staying power. Great story though.
Focus on earnings:
http://www.decisionpoint.com/TAC/SWENLIN.html
TPC, exactly right!! It’s a deleveraging beast.
http://www.businessspectator.com.au/bs.nsf/Article/Lacy-Hunt-$pd20090129-NR997?OpenDocument
Thanks Paul. We’ll see how things progress, but the current trade is just that. As mentioned above earnings expectations appear very low to me so being short anything into earnings looks like a bad idea.
I’ll make it easy for all of you. The equities markets will go in the direction that the Federal Reserve wants them to go via their vehicles Goldman Sachs, JP Morgan and Morgan Stanley.
TPC,
It’s not a golden bull market cross yet look at the SPX on a weekly. It’s only a golden cross when the 13 day moving averag crosses over the 50 day moving average on a weekly chart and the closing price is above the the 50 day moving average with subsequent weekly higher confirmations.
I think we are in the early stage but not quite there yet.
ctc
Paul, TPC’s responsiveness and great posts are the reason this is the numero uno stop here.
TPC, careful on the earnings train, how’d that work for RIMM, etc. My Vix position is hurting bad, let’s hope that we get some put action soon!! Feel good about your 945, I think it is gonna hold for some time.
Prescient,
thanks. It’s a real pleasure to have such great readers.