(By Michael Harris) This is not good even for longer-term investors. Using a 50-day moving average crossing a 200-day moving average to make trading or investment decisions is like trying to race against a sports car on a bicycle. In this post I show with specific examples from SPX and other international markets why this "death cross" is a thing of the past that no longer works because nowadays markets are too fast for these averages
Actually, Eddy Elfenbein is quite right when he wrote yesterday that "I caution long-term investors not to take this signals too seriously". The intention of this post is to add some quantitative support to his statement.
I will try to make a long story short. As it may be seen from the daily S&P 500 index chart above, a 50-200 simple moving average cross, stop and reverse system, has resulted in negative equity performance since its first trade in 2010. So why is it that some traders think it is important? In my opinion, the reason for that is that some authors in the past pushed this system in articles or books because it worked in the past when markets were slower and there was not HFT and low latency around. Here is the performance since 1990:
It may be seen that this cross worked well up to 2010 due to some big jumps in equity shown on the detailed trade list below.
But after 2010, the gains for long signals have been small and for short signals they have been negative. As a matter of fact, the same system shows exactly the same behavior in other international markets, like for examples in the Shanghai Stock Exchange Composite Index and the Australian S&P/ASX200 index:
In my opinion we can declare the idea of the SPX death cross as a viable signal for market entry/exit useless because of the speed by which the markets decline and recover nowadays.
Disclosure: no relevant position at the time of this post.