I am building out simple but effective trading models that combine fundamental analysis with technical analysis. Right now I am trying to combine 2 models into 1 model that’s more effective (combining the Golden/Death Cross model and the Initial Claims model).
I previously did a study which concluded that the Death Cross isn’t consistently bearish for the stock market. This is because Death Crosses frequently mark the bottom of corrections in bull markets. This is more often a bullish sign than a bearish sign because there are too many false bear signals.
*The “death cross” occurs when the stock market’s 50 daily moving average crosses below its 200 daily moving average.
One of the blog’s readers (Mark) stated:
The death cross is useful if still active after 8 months. This would have prevented the big 50% losses in the 2000-2003 and 2007-2009 Bear markets. Long term Investors would have exited at 1250 in June 2001 and 1300 in August 2008, avoiding the worst of the fall.
In other words, Mark suggested that this simple technical measure could be used to predict the worst of bear markets. Is this true? Does this modified indicator give any false signals? (i.e. “significant corrections” that don’t turn out to be bear markets).
Let’s test out this hypothesis. What happens when:
- A death cross occurred 8 months ago (168 trading days), AND…
- The S&P 500’s 50sma has been below its 200sma this entire time (all 8 months).
Here are the historical cases
- August 21, 2008
- June 29, 2001
- March 2, 1982
- October 31, 1977
- December 14, 1973
- February 19, 1970
- December 27, 1966
- October 12, 1960
*You can download the data in Excel here.
Let’s look at these historical cases
August 21, 2008
This modified signal occurred before the worst of the 2008 bear market.
June 29, 2001
This modified signal occurred before the worst of the 2001 bear market.
March 2, 1982
This modified signal occurred near the bottom of the 1980-1982 “significant correction”. False signal.
October 31, 1977
This modified signal occurred near the bottom of the 1976-1978 “significant correction”. False signal.
December 14, 1973
This modified signal occurred before the worst of the 1974 bear market.
February 19, 1970
This modified signal occurred before the worst of the 1970 bear market.
December 27, 1966
This modified signal occurred near the bottom of the 1966 “significant correction”. False signal.
October 12, 1960
This modified signal occurred near the bottom of the 1959-1960 “significant correction”. False signal.
As you can see, this modified version of the death cross still has too many false signals. Although it does appear before the worst of historical bear markets, it also appears near the bottom of some historical “significant corrections”. Traders who sold their stocks because of this modified death cross did so at the wrong time.
In tomorrow’s post I’m going to show you how to use this modified death cross to improve the Initial Claims trading model.