The Golden Cross: Does it Work?
A lot of investors have been talking about the Golden Cross of late which is when the 50 Day Moving Averages crosses the 200 Day Moving Average to the upside which is supposed to be a bullish sign.
Well let's look at some data going back to 1896 in the Dow and see if it's really that bullish of a signal or not. The table below summarizes all of the Golden Crosses for the Dow since 1896 along with the 1 Month, 3 Month, 6 Month and 1 Year Performances. (The 6 Month and 1 Year Performances were not calculated for 1913 and 1914 as the market was closed for a period of time due to World War I)
As you can see there is a slight bullish trend in the 6 Month and 1 Year Performance with an average return of 3.5% and 7.0 % respectively however the 1 Month and 3 Month Returns are negligible.
| Bear
and Bull Markets Combined |
| Total |
1 Month |
3 Month |
6 Month |
Yearly |
| Signals |
Return |
Return |
Return |
Return |
|
|
|
|
|
| Negative
Return |
31 (44%) |
34 (49%) |
26 (38%) |
25 (36%) |
| Positive
Return |
39 (56%) |
36 (51%) |
43 (62%) |
44 (64%) |
| Total
Return |
27.64 |
89.96 |
242.64 |
482.89 |
| Average
Return |
0.39% |
1.28% |
3.52% |
7.00% |
Next I broke down all of the Golden Crosses based on what type of overall market environment was in place. I defined the period from 1896-1905 as a Bullish Market, 1906-1920 as a Bearish Market, 1921-1929 as a Bullish Market, 1930-1950 as a Bearish Market, 1951-1965 as a Bullish Market, 1966-1981 as a Bearish Market, 1982-1999 as a Bullish Market, 2000-2002 as a Bearish Market and finally 2003 through 2007 as a Bullish Market.
First I will show the table for a Bearish Market. Notice the overall performance of Golden Crosses in a Bearish Market is substantially worse as the average 6 Month and 1 Year
Performances are only 1.5% and 2.1% respectively.
| Bear
Markets Only |
| Total |
1 Month |
3 Month |
6 Month |
Yearly |
| Signals |
Return |
Return |
Return |
Return |
|
|
|
|
|
| Negative
Return |
21 (54%) |
23 (59%) |
18 (49%) |
18 (49%) |
| Positive
Return |
18 (46%) |
16 (41%) |
19 (51%) |
19 (51%) |
| Total
Return |
-21.82 |
18.93 |
56.59 |
79.25 |
| Average
Return |
-0.56% |
0.49% |
1.53% |
2.14% |
Meanwhile if we now look at Bull Markets only notice the performance improves dramatically as the average 6 Month and 1 Year Performances are 6.0% and 13.0% respectively as compared to 1.5% and 2.1% for Bear Market environments.
| Bull
Markets Only |
| Total |
1 Month |
3 Month |
6 Month |
Yearly |
| Signals |
Return |
Return |
Return |
Return |
|
|
|
|
|
| Negative
Return |
10 (32%) |
11 (35%) |
8 (26%) |
7 (23%) |
| Positive
Return |
21 (68%) |
20 (65%) |
23 (74%) |
24 (77%) |
| Total
Return |
49.46 |
71.03 |
186.05 |
403.65 |
Thus when a Golden Cross occurs in the Dow it's important to know what type of market environment is in place. Currently we are in a Bearish Cycle so if we do see a Golden Cross eventually occur in the Dow history suggests it may not be followed by substantial gains in the longer term.
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