The previous post took a quick look at what happens one year later with the S&P 500 when the Dow Jones completes a Golden Cross before the S&P 500. This post will look back farther in hopes that we might draw some conclusions about what this might mean for the next year.
I continue to look for what it might mean when the Dow Jones is outperforming the S&P 500. This test will use more than 60 years data from the S&P 500 and Dow Jones.
The Rules
Buy the $SPX at the close if
- the Dow Jones ($DJI) completes a Golden Cross
- and the S&P 500’s 50 day moving average is beneath its 200 day moving average
The trade will be held for one year. No commissions or slippage included.
The Results
There were only 11 trades held the full 252 days for the setup (blue line) so sample size is very small. The first trade was on December 26th, 1962. We can see that this setup yields an average trade that is right at %0.0, after 252 days. This is not good. I suspect most randomly selected 252 day periods from $SPX would yield significantly better returns than the setup.
For the sake of comparison, I included all the Golden Crosses on $SPX, with the first trade taking place in 1963 (red line). There were 22 trades held the full 252 days. After 252 days, the average return is near %11.5. Obviously, this is a huge improvement over the setup.
I’m still not sure why the S&P 500 can barely muster a gain a year after a Golden Cross on the Dow Jones. It seems that the S&P 500 would follow in the footsteps of the Dow Jones and complete its own Golden Cross. The test above shows that might not be the case.
There is more work to be done here. I am seriously intrigued why a Dow Jones GC when the S&P 500 has not yet crossed has generated a neutral S&P performance after a year.
Great analysis, and probably pretty important. I don’t know what is wrong, but seeing 252 day performance like that clearly says things aren’t good.
My latest guess is that the mid-caps in the S&P need to move coincidentally (or maybe even prior) than the large-caps, in order for a rally to be “genuine”. If the mid-caps lag even for a few days the Dow wins and it’s bad news. I know this violates the “generals lead the troops” concept, so it’s really just a guess….
Thanks Bozo. I think I’ll look at the Russell 2K tomorrow. Perhaps comparing crosses on that index vs.Dow and S&P will give some more information on this.
do the changes to the dow components mean anything to this trade? obviously they have changed in the past also. interesting stuff no doubt.
I’m sure the changes have an effect. I’ve no idea though how to account for that.
well, its usually not a good sign for bulls if Dow is leading. Tis better if RUT & NDX are leading the market.
So, it the biggest names are doing well, maybe the boyz are just holding up the indices using a few names, while selling the other stuff
If the Dow is leading, risk aversion abounds. I would also expect that
1. volatility would be elevated all year (choppy market, everyone trying to time the start of the next bull market)
2. The equal weighted S&P 500 index, ticker RSP. would lag the Dow even worse than the cap weighted S&P. Maybe worth a check, Wood?
Interesting, that RSP. I’m not at my platform so I can’t look at how much data there is, but if it goes back far enough, we can test with it.
hey wood, please send me an email, i thnk i bought a garment from your wife. [email protected], thanks
Massive bear flag on the S & P and Russell. Game over. Just need to get through MLK weekend and Jan option expiration and market goes down. Higher market means no QE3. Banks have to have QE3. Market goes down.