The Golden Cross commonly refers to the crossover of two moving averages to signal that the market is going up. It is a useful tool because it tells you when we are in a bull market, which is the time to be fully invested in stocks or equity funds.
You may also have heard about the Death Cross. The Death Cross is the opposite of the Golden Cross. It is usually defined to be when the 50 day moving average crosses below the 200 day moving average. Since the market is going doing, it indicates the onset of a bear market. When you get a Death Cross signal, it usually means it’s time to be more conservative, sell some equity positions and possibly increase your bond or cash positions.
Golden Cross Timer Performance
I define the Golden Cross Timer as the indicator that gives us the Golden Cross signal in an up market, and the Death Cross signal at the onset of a bear market. As with any investment indicator, the Golden Cross Timer is useful but not perfect. Remember that investing is a game of putting the odds in your favor. There is no such thing as a guaranteed investment in the stock market. The goal is to get enough wins while minimizing your losses, so that overall you end up doing better than the market average.
Let’s take a look at the Golden Cross Timer on the S&P 500 excluding dividends. First, the performance over the last 15 years.
Not bad performance at all. The Golden Cross Timer did a near perfect job, taking us out of the market (via the Death Cross) during the two most brutal bear markets in recent history: in 2000 – 2003 and in 2008 – 2009. There was a couple of small blips in late 2010 and again in late 2011 where it got us out. At first glance, this doesn’t seem to affect performance much. So looking at this by itself, the Golden Cross Timer appears to be a clear winner.
However, this is hardly statistically significant because there were only two major bear markets during that period. What’s more, the two blips in 2010 and 2011 did, in fact, reduce performance somewhat. For example, the Golden Cross Timer curve actually went down from early 2010 to late 2011, whereas the non-timed version of the S&P 500 increased over that period. This doesn’t seem too significant at first because the Golden Cross Timer did so well in taking us out of two brutal bear markets. Still, it shows some level of imperfection, and we should therefore dig deeper to understand its consequences.
Now let’s look at the performance in an earlier period, from 1985 to 2000.
Wow, what a difference a time frame makes. Here, the Golden Cross Timer clearly underperformed the non-timed version of the S&P 500. But why?
First, we see that it missed calling the 1987 market crash, staying fully invested and suffering similar losses as the S&P 500. Second, it looks like it made a series of bad calls. It was out of the market during the 1990 recession, but the market moved up shortly after going down enough to trigger the Golden Cross Timer. A similar thing happened in 1994, and again during the Asian Crisis in 1998. In the end, the accumulation of missing out on fairly small gains during each of these bad calls resulted in a portfolio nearly 50% below the index over the entire period.
So our Golden Cross Timer “insurance” did, in fact, cost us something. It potentially saved us from major bear markets, but at the cost of some upside during the following recovery. In other words, if the bear market is really bad, then we win by being out. If the bear is shallow, then we lose by missing out on the early gains during the recovery.
Is the Golden Cross Timer Useful Then?
It certainly can be, but it depends on your objectives and how you use it. The obvious challenge is that we don’t know, at the onset of a bear market, whether it will be shallow or deep. This is why many financial advisers recommend to just stay put with a well diversified portfolio and not do anything. However, given how bad the last two bear markets have been, and the level of instability in global financial markets in general, I’d argue it’s not unlikely that we could see another major bear market at some point over the next several years. This is just an opinion of course, but nevertheless it’s worth considering the use of a timer for portfolio protection.
A potentially useful way to use the Golden Cross Timer is as a measure of market momentum, rather than as an on-off timer. When it’s on, it’s probably a good idea to be fully invested. When we get an off signal however, it may be a better idea to be more conservative and very well diversified, with an emphasis on holding some cash and defensive positions. It’s also a good idea to own bonds and some gold as well, while reducing the equity positions. In other words, reduce risk exposure, but don’t necessarily get out of the market.
Remember that cash is good to have during volatile times for two reasons: first to protect you against further downside, and second, to have the ability to buy stocks and equity ETFs at rock bottom prices. So just the knowledge that an imminent bear market is highly probable, even if uncertain, can be invaluable. You can use that information to position your portfolio defensively and take advantage of near term buying opportunities when it signals a recovery is happening.