After further analysis, I’ve decided that the results of the last post, Dow Jones Golden Cross and the S&P 500 Has Not Crossed – Lackluster Year Ahead?, are not robust. I believe the results are a function of randomness (part and parcel of a small sample size) and the way I structured the test.
I was still intrigued though, and so I changed the test a bit. The new test trades the S&P 500 anytime that the Dow Jones completes a Golden Cross, as long as the S&P’s 50 day moving average is less than its 200 day moving average (just like the last test). Here is what I changed: Rather than holding the trade for X number of days, the S&P position is sold whenever the Dow Jones completes a Death Cross. Basically this setup is trading the S&P 500 rather than the Dow Jones, using the Dow’s GC signals, with the exception that we are buying the S&P when it has not yet completed a Golden Cross. Anyone confused yet?
All the results below do not account for commissions or slippage. Data used goes back to 1960 for both indices.
Using this method yielded these results for $SPX:
- Compound Annual Return = 1.60%
- Average number of days held per trade = 200.57
- Average trade profit or loss = 9.64%
- Win % = 42.86%
- 14 trades
- Sharpe = 0.26
These results are significantly better than the results generated when NOT using the $DJI Death Cross as an exit signal.
Let’s compare the above results to the Dow Jones Golden Cross results (simply trading the $DJI based on the GC buy signal and selling it on the Death Cross):
- Compound Annual Return = 4.72%
- Average number of days held per trade = 216.42
- Average trade profit or loss = 8.36%
- Win % = 55.26%
- 38 trades
- Sharpe = 0.31
And finally, let’s look at the S&P 500 Golden Cross traded with $SPX and selling on the Death Cross:
- Compound Annual Return = 6.21%
- Average number of days held per trade = 324.58
- Average trade profit or loss = 14.73%
- Win % = 80.77%
- 26 trades
- Sharpe = 0.41
The bottom line is that you don’t want to trade $SPX using $DJI Golden Cross signals. Furthermore, if you are into long-term trendfollowing, you probably want to ignore a $DJI GC and wait for a $SPX GC. At this time, I cannot determine any conclusive evidence why the $DJI crossing before the $SPX is bad. It still seems like it should be, though
Thanks to the two or so readers who have followed me down this rabbit hole. I can tell by traffic that this series has not been very popular. I’ll promise to move on to more exciting things!