Thursday, June 11, 2009

Golden Cross update

This is a follow-up post to one from January on the same topic.
http://quicktakespro.blogspot.com/2009/01/golden-cross.html

The Golden Cross is a trend following technique that gets you long when the 50-day exponential moving average crosses above the 200-day exponential average. The Death Cross, or Black Cross, is the opposite and it gets you short. Over the past decade it has worked sweetly.

We ran a chart of this in the newsletter this morning showing how things have been developing lately. My editor also asked about it but my answer was that it is not quite ready for a serious challenge to the current bearish view. In other words, it will be some time before the Golden Cross can occur barring a market melt-up.

You will see this in my column when it gets close but thinking back to the summer of 2006 when they almost crossed (to the downside) I will remind you not to jump the gun.

As for the long or short only result, you have to use money management, too. That would have gotten you flat a long time ago after (but not at) the March bottom.

7 comments:

Paul O'Cuana said...

I think I counted 9 or 10 trading days where the SPX tried but failed to break out above its 200 day MA.

Is this bullish or bearish?

Paul O'Cuana

Amalan said...

A quick update on the general bullishness reported in the recent past on this blog. In one of the Canadian channels, I don't know how many times they repeated in the last week or two that "almost everyone is looking for a market correction at this point", and in the U.S., NBR had many guest commentators say the same thing (but not as many that it exceeded 50%?). This indicated to me there was bearishness amongst professionals, so perhaps the bullishness reported by statisticians is more about the general public? At least AAII is about general public I think, but Investors Intelligence is strictly on pros, isn't it?

Not sure what to take from the sentiment scenario right now. Perhaps that explains the tight range...

Amalan

Paul O'Cuana said...

Amalan,

I've followed the weekly Investors' Intelligence survey for the past 22 years. It's somewhat subjective but I believe only two people have been conducting the survey since 1964. Every week they survey investment advisors, i.e., newsletter writers, to come up with their numbers. They fall into three categories, Bullish, Bearish, and Correction. The correction camp is made up of those who are basically Bullish but are expecting some kind of pullback.
The most popular use of these numbers is the "Bullish Ratio" which ignores the Correction Camp and is calculated by dividing the number of Bulls by the total of Bulls and Bears. Bulls/(Bulls+Bears)
latest week:
Bulls 47.7 Bears 23.3 Correction 29.0
So, someone who is looking for a 5 to 10% correction before the market takes off again is not really considered a Bear.
I hope this helps.

Paul O'Cuana

Amalan said...

Paul,

thanks. I too have followed the Bullish Ratio on and off for the last 10-15 years, but I have not paid much attention to the Correction camp. I guess your point is that the media folks who keep saying they expect a correction soon are falling in the 29% block (Correction camp) and are not considered bearish. I am assuming that most of these commentators on TV/Radio are also advisors with their own newsletters.

On a separate note, people say that once an indicator becomes widely followed public knowledge, it stops working. And Investors' Intelligence numbers are fairly widely followed, and so I wonder how effective it can be. I wondered the same about well known theories in technical analysis also...

Ken Fisher of Forbes formulated a theory where he said if we plot the year-end estimates of S&P500 by the 50 economists polled by Forbes every year, we'll find a spot/gap that will not have any data points, and it is that gap which will come true. This worked like a charm in the first year he published the theory - I think it was 2003. His prediction, which was such a spot in the plot, came within less than a percentage point of the actual year-end index close. But, I have not seen it work after that!

As Fisher himself says, the market is a "Great Humiliator". It humiliates everyone. The only way to win seems to be by associating probabilities to the estimates in conjunction with stop losses on the trades.

-amalan

Paul O'Cuana said...

Amalan,

"Investors' Intelligence numbers are fairly widely followed, and so I wonder how effective it can be."

I think they can be effective in a limited way. I don't think many people engage in a sort of double-think, such as, "I was bullish but seeing how much company I have I'm turning bearish."
I use the numbers to pick market bottoms, and I don't discuss the details, but it can be years between buy signals; not useful to most people.
Another way I use the numbers is more intuitive, for example, if advisors get Bullish while prices are falling then I stay out of the way.
The other major limitation to the numbers is the context. In other words, if we're still in a bear market then the fact that the Bullish Ratio hasn't been this high since December 2007 is very troublesome, but if it's Dow 12,000 by October (see CNBC) then the Bullish Ratio means little or nothing.

Paul O'Cuana

Michael Kahn said...

Paul,

I look at repeated attempts to breach resistance as bullish since the market will be only too happy to allow shorts to enter just before it breaks through. Weak markets do not hang around resistance for long.

But that is the normal case. I am not so sure what we are seeing is normal.

Michael Kahn said...

you guys have it nailed.