Valuable Insights from Around the Web – Tue 26 Jun, 2018

Are Golden and Death Crosses a Good Bet?

I found this post by FactSet very interesting. I have found there are 3 types of people when it comes to techincals.

  1. Those who love techincals and charts and use consider them before any trade.
  2. Those who pay zero attention to techincals and think they are useless and
  3. Those who can not figure out if they actually work or not but see some people claiming they are making a lot of money off of technical trading. I find these are the people would most of the time get burned because they find someone with a simplistic way of “reading the charts” and when they jump on a trade it goes the other way.

When considering the “golden and death cross” we need to understand this is one of thousands (possibly millions) of technical factors to consider. Here’s some food for thought…

There is a lot of debate surrounding the validity of technical analysis, but for many, it is an important tool in predicting future price movements of stocks. Two well-known technical analysis tools are the golden cross and death cross. Is there any value to these technical indicators?

A golden cross is a positive momentum indicator, occurring when a security’s short-term price moving average moves above its long-term moving average. The opposite of a golden cross is a death cross, marking the point where the short-term price moving average moves below the long-term moving average. In both cases, the short-term moving average is usually a 50-day moving average, while the long-term moving average is a 200-day moving average.

Each cross signals a price trend. For example, a golden cross is seen as a strong indication that a security will continue to go up in price. Conversely, a death cross is an indication that a security will continue to see its price decline. The chart below is a good example of both a golden cross and a death cross occurring for Apple between August 2008 and August 2009.

Apple Example

Examining Golden and Death Crosses Over the Last 20 Years

We set out to investigate whether historical returns data supports the validity of golden and death crosses across companies and sectors. Our universe included companies domiciled in the United States with a market cap of at least $300 million at the time of the cross. For these companies, we recorded all crosses between December 31, 1998 and March 31, 2018 in order to capture two recessions and two bull markets. We then tracked security performance over one-month, six-month, and one-year time horizons starting at each cross, grouping the securities into sectors. We also wanted to see how the crosses performed in the short run versus the long run, so we compared our 20-year performance data against returns from July 1, 2009 through March 31, our current bull run.

Golden Cross and Death Cross Return Rates

On average, for the time horizons tested, golden crosses show positive returns over the short term for most sectors. When comparing golden cross and death cross returns over the two different time horizons we see some interesting results. Our expectation of golden cross positive performance holds mostly true for our longer time horizon back to 1998. However, counterintuitively, it appears that death crosses also have positive returns and even outperform golden crosses in our current bull market. Rather than giving a signal to sell or short a stock, the death cross has been an indication to buy at a low price (and be rewarded with a stock price turnaround).

Sector Differences

Energy is a unique case when looking at price performance through the lens of crosses. Technical analysis plays almost no role in decisions to purchase energy stocks; investors are more focused on the price of oil and other relevant industry metrics. Therefore, it is not surprising to see almost no correlation between crosses and price performance. The chart below, showing Occidental Petroleum’s correlation to the price of oil, is more indicative of price performance than the golden or death cross indicators.

Occidental Oil Example

Information Technology is another interesting sector. IT’s post-cross behavior differs significantly between our 20-year time frame and the current bull market. When we look at average returns for IT stocks since July 2009, we see death cross average returns, for six-month and one-year holds, greater than that of golden cross returns. This is likely due to the strong performance of IT over the past nine years. When IT death crosses were supposed to point out negative momentum, they actually pointed out price lows, and investors who bought at these lows profited when the stocks rebounded. For our longer time frame, death crosses yielded positive returns, but the returns were lower than for the golden crosses. Note that this longer time horizon includes the 2000 dot com bubble. IT stocks took a significant hit when that bubble burst, but investors still saw positive returns for the sector as a whole.

The jury is still out for our golden and death crosses. It seems if you are in a bull market, death crosses only point out discounts, and not negative price momentum. Golden crosses still appear to pick winners over the long run, but death crosses appear to pick winners in bull markets.

 


Comments:
  1. On June 26, 2018 at 12:41 pm,
    KD Dougan says:

    Great stuff Cory. Lets hope sooner than later. This is getting real old. Good news that is usually sign of a bottom when at absolute despair and hopelessness.

  2. On June 26, 2018 at 1:38 pm,
    james says:

    GOLD Cory GOLD !!! Good stuff Cory ! Cool is the way BUY SILVER !!!!

  3. On June 26, 2018 at 2:55 pm,
    Jay T says:

    FWIW Gary Savage has made a pretty good case on his paid site (so I can’t share charts) that the cross of the 100 WMA over the 200 WMA is a better metric as “death cross”/ “golden cross” than the 50 which he says gives several false signals.

    • On June 26, 2018 at 11:30 pm,
      Excelsior says:

      That’s an interesting point to consider on the 100 WMA / 200 WMA versus the 50/200.

  4. On June 26, 2018 at 4:10 pm,
    CFS says:

    Tinka drills 10.4 metres grading 44.0% zinc in new discovery of exceptional zinc grade at Ayawilca
    VANCOUVER, June 26, 2018 /PRNewswire/ – Tinka Resources Limited (“Tinka” or the “Company”) (TSXV & BVL: TK) (OTCPK: TKRFF) is pleased to announce assay results for seven recent holes from its ongoing resource step-out drill program at the Company’s 100%-owned Ayawilca project, central Peru. Six holes are reported from the West Ayawilca area (holes A18-117, 120 to 122, 126, 129) and one from the Central area (A18-127).

    Hole A18-129 has intersected exceptional grades of zinc sulphide mineralization at West Ayawilca in a new setting for mineralization at Ayawilca. A mineralized interval of 10.4 metres grading 44.0% zinc occurs within a zone consisting of more than 90% zinc sulphides (sphalerite). This is the highest-grade zinc intersection ever encountered at Ayawilca over a significant interval. The high-grade mineralization occurs immediately beneath phyllite (metamorphic rock) within a repetition of the Pucara limestone formation which is favourable for mineralization and typically found above the phyllite. The mineralized interval is interpreted to be flat-dipping and close to true thickness. This is the first time that Tinka has tested the proposition that there may be a repetition of the mineralized Pucara limestone under the phyllite encountered at the base of most other holes at Ayawilca. It is notable that such an outstanding zinc intercept has been drilled in the first repetition of the Pucara limestone encountered thus far. Additional drill holes are planned to test for the continuation of the high grade mineralization in this repeated limestone.

    • On June 26, 2018 at 11:30 pm,
      Excelsior says:

      +44