Ghosts of Death Cross Past

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A “Death Cross” is a hilariously ominous name for a technical market condition where the 50-day moving average crosses below the 200-day moving average. One just occurred in the Russell 2000 Small Cap Index $IWM. Despite what you may have heard in the financial media, this sinister and devastating menace is about as harmful to your investments as regular portfolio rebalancing and dividend reinvestment. Not to imply the market can’t or won’t go down, just that if it does, it has nothing to do with the “Death Cross.”

Long-term trend following indicators are seductive because they appear predictive to the naked eye. Closer inspection (like highlighting on the chart) can reveal they are often very late to the party. Mechanical trend following strategies like 50-200 MA crossovers lean on big fat-tailed distributions for their return. That’s why the “Golden Cross” works so well and the “Death Cross,” while purportedly used to time short sales and market exits, is still a decent long signal. Downside distributions are big and vicious, just nowhere near as big or as persistent as the upside.

Here’s how the “Death Cross” treated you 60-days after the signal occurred in the last 10-years. 60% win rate and worked out to almost 4-1 risk reward. Decent long strategy if you have a multi-month time horizon and can handle a drawdown.

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Want to analyze this for yourself? Follow this link to the analysis to change settings and play around with the data.

 


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