Market timing -The Golden Cross

The golden cross is one of the most famous methods of market timing, it is based on 50 day and 200 day moving average. The rules are simple: 

  • Buy if the 50 day moving average crosses above 200 day moving average.
  • Sell if the 50 day moving average crosses below 200 day moving average.

For this test we will use the S&P500 index. Back-testing this simple market timing strategy for the last 5 decades (since 1961) resulted in:

  • Annual return of 6.69% (vs. 6.79% buy and hold)
  • Max draw-down of -33% (vs. -56% of buy and hold)
  • Ulcer index of 8.16 (vs. 16.2 of buy and hold)
  • Sharpe of 0.31

We can clearly see that while there was almost no change in annual return we reduced draw-down risk almost by half. Implementing the same strategy on a monthly basis will help us reduce whipsaws and improve performance, these are the results when I used 2 month and 10 month moving average cross.

  • Annual return of 7.11% (vs. 6.79% buy and hold)
  • Max draw-down of -27% (vs. -56% of buy and hold)
  • Ulcer index of 7.1 (vs. 16.2 of buy and hold)
  • Sharpe of 0.35

Nice improvement!