The ‘Death Cross’ is a term used to describe the behaviour of two moving averages in relation to each other. A death cross occurs when the shorter-term average crosses below the longer-term average. The opposite pattern - a ‘Golden Cross’ – was the topic of my July 2009 article Is it Really Golden?
In this article we are going to look at the historical performance of the stock market in the 12 months following a 50-day/200-day Simple Moving Average death cross. From the previous research we know that a 50/200 golden cross has seen the Dow Jones trade higher 12 months later in 72% of cases since 1929 (these results were surprising considering the typically poor performance attached to trading basic moving average crosses alone). The last golden cross in July 2009 also saw a 17% gain on the Dow in the twelve months that followed. Will the death cross be the same in reverse?
First, below is a chart showing the recent death cross on the Dow Jones (INDU : CBOT).
Chart 1 – INDU - Death Cross
click to enlarge
Many other major indices around the world including the S&P 500 (SPX), Russell 2000 (RUT), NASDAQ 100 (NDX), FTSE 100 (FTSE), Hang Seng (HHA-CASH) and ASX S&P 200 (XJO) have recently shown this pattern as well.
Since 1929 the market has been lower 12 months after a death cross just over 35% of the time. On average the market does decline 12.42% at some point during that 12 months, with the largest decline being 43.90% in 1937 and the smallest 0.40% in 1992. However, overall the market is up an average of 3.85% at the end of the 12 month period. The average increase at any point during the same 12 months is 14.44%. The largest increase was 79.38% after the cross in 1932 and the smallest 0.61% in 2008.
The numbers clearly suggest that the death cross works, except when it doesn’t – which is more often than not. Chart 2 shows the figures discussed above applied to today’s market.
Chart 2 – INDU – 12 months After Death Cross
click to enlarge
Interestingly, the second best performing death cross occurred in 2008.
The key points on the testing are as follows. Testing was run over the INDU symbol starting in 1929. Both the INDU and DJ-CASH symbols contain data back to 1910 on the Dow so either can be used. 1929 was chosen as the start date (as opposed to 1910) as the data before 1929 is somewhat ‘scattered’. All signals were held for 12 months (252 trading days).
Based on that testing, overall the death cross certainly doesn’t live up to its namesake and actually performs better as a bullish signal (just). The reason for this, in my opinion, is that typically bearish moves are shorter than bullish ones and so by the time a long-term death cross occurs most of the bearish move has already been completed.