Written by Ryan Mallory
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28 July 2010
Much has been made of the recent 50-day moving average that crossed below the 200-day moving average on the S&P. Among individual stocks, when the 50/200 cross occurs to the downside, many traders take it as a sign to get out of the stock immediately, or to start a new short position. With that being said, and the failed attempt, to-date by the bears to drive this market lower in the wake of a the 50/200 death cross, I asked myself, is this even a legitimate phenomenon that we should be paying attention to? Is there a legitimate play that we can take advantage of when this death cross comes about? So I decided to run some tests on my own and here is what I found.
For my testing I looked at all the stocks in the S&P 500 over the past five years - let me just say that if there hasn't been a correlation in the past five years, is it really worth trading? So let's begin.
Here are the results for when any stock in the S&P 500 experienced the death cross and the subsequent results over the next month brought as a result (had you shorted the stock when the death cross occurred). As you can see not all that exciting at all.
So maybe there is the slightest edge there, but not enough, in my opinion, to warrant any statistical significance. By the time you are done with commissions and SEC fees and such, there's probably nothing but a nasty loss staring you in the face.
But perhaps I wasn't giving the death cross enough of an opportunity to do something with these stocks, and maybe I should expand my time horizon to 3 months instead - so that is what I did, and here are the results had I shorted the stocks during the 3 month time period.
Once again not all that impressive. In fact, the results are pretty much the same, except there are a few open positions still out there, that haven't been accounted for since they are still in the 3-month window, which is the reason for the difference in total trades (but none of those trades would alter the findings).
So Then I took the inverse of the trades, and looked at what it was when you BOUGHT the stock on the 50/200 death cross and SURPRISE! The results were the inverse of shorting the stock, but clearly unprofitable, just like short trade was. But what obviously stuck out to me is the fact that 54% of the trades were correct. Same goes goes for the 3-month Buy Signal.
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