01.28.2023

## The following research explores what history can teach us about the S&P 500 following a *Golden Cross. *

**THE BIG PICTURE**

In the parlance of technical analysis, a *Golden Cross* is when the 50-day moving average crosses above the 200-day moving average on a price chart. As we near the end of January 2023, these *Golden Crosses* have been a hot topic of conversation. *Golden Crosses *have just happened, or are close to happening, on many charts of individual stocks, ETFs, ratio charts, and indices. Technical analysis folklore generally believes this phenomenon is a bullish indication, though there the skeptics and rightfully so. Historical testing reveals the *Golden Cross* leans bullish on certain charts, while the results on other charts are no better than a coin-toss. In some cases, the *Golden Cross* is actually better interpreted as a sell-signal. This dispersion of outcomes is the reason we need to understand the *Golden Cross *on a symbol-by-symbol basis.

The chart below is the S&P 500 Index. After Friday's close, 01/27/2023, the 50-day moving average is just under a half percent, .37%, below its 200-day moving average. Price itself has been removed for clarity. The chart shows we might get our next *Golden Cross* any day now. In preparing for this signal, the following research is an exploration of past *Golden Crosses *and the statistics of their historical returns and drawdowns.

##### S&P 500 Daily. Click to enlarge.

**ABOUT THE DATA**

The following statistics have been calculated in Microsoft Excel using S&P 500 data courtesy of Optuma. Like most data sets, this one is fraught with uncertainties. The history of the S&P 500 is a bit cloudy. We know Henry Poor formed Poor’s Publishing in the 1860s. Online sources explain, he published both weekly and daily indices. Some sources mention 90 components while others mention 233. The consensus seems to be something to the effect of: Henry Poor started publishing his Composite Index around 1923. It then changed its name to Standard & Poor’s Composite Index sometime around 1941. This is when Poor’s Publishing merged with Standard Statistics. 1957 is likely when the S&P Composite became what we know it as today; A market-capitalization index of large companies with more than 500 ticker symbols.

Optuma’s S&P 500 Composite data set begins in January of 1950 with closing prices only. It then adds the high, low, and opening prices in April of 1982. Going back to the start of Optuma’s data set, 1950, the S&P 500 has experienced 36 Golden Crosses. The chart below shows us those *Golden Crosses*. Price has been removed for clarity. Please note, the following results do not account for slippage and commissions/fees which will reduce the gains and increase the losses.

##### S&P 500 Daily From 1950 w/All Golden Crosses. Click to enlarge.

**THE RESEARCH**

First, we will consider the 21-day period following the Golden Cross. We will buy the index at the following day’s open, hold for 21 days, and sell on the following day’s open which is day 22. Below is the distribution of these returns and the summary statistics. The distribution chart shows us how many times the signal has resulted in a gain or loss of a certain magnitude. For example, the left most bar shows us price has returned between -6% to -7% 1 time, while the bar to its immediate right shows us price has returned between -5% and -6% 2 times.

##### Distribution of Returns and Summary Statistics. 21-day hold. Click to enlarge.

Following the 21-day holding periods, the following statistics emerge:

There is a 61% chance of price closing higher and a 39% chance of price closing lower.

The average gain was 1.4%.

The best return was 9.8% following the 1982 signal.

The worst return was a loss of 6.6% following the 1960 signal.

M.A.E. stands for Maximum Adverse Excursion. This statistic helps tell the story of how price traveled during the holding period. The MAE tells us how far price traveled below our entry price over the life of our holding period.

The average MAE over 21 days is a very easy 2.2%. This number however is only an average. Very rarely do we actually see the average number.

The maximum MAE followed the 2015 signal. That resulted in a 10.4% drawdown before ultimately closing with a loss of 5.78%.

31 of the 36 signals, 86%, gave us a drawdown of less than 5%.

Next, we consider a holding period of 42-days. The distribution of returns and summary statistics are below.

##### Distribution of Returns and Summary Statistics. 42-day hold. Click to enlarge.

There is a 75% chance of price closing higher and a 25% chance of price closing lower after holding for 42-days. These odds are much better than the 21-day hold.

The average gain of 2.4% is a whole percentage point higher than the 21-day hold.

The best return was a gain of 14.5% in the middle of 2009 off the bear-market low.

The worst return was a loss of 12.9% in 1969.

The average MAE is a drawdown of 2.8%.

The maximum MAE was a loss of 13.34% following the signal of 1969, which was also the worst return resulting in a loss of 12.91%.

29 of the 36 signals, 80%, gave us a drawdown of less than 5%.

Finally, we consider a holding period of 63-days. The distribution of returns and summary statistics are below.

##### Distribution of Returns and Summary Statistics. 63-day hold. Click to enlarge.

Our odds increase to the largest of the holding periods with a positive return 78% of the time. That leaves a 22% chance of price closing lower after 63-days.

The average gain increases to 4.2%, larger than the 21 and 42-day holding periods.

The largest gain was an impressive 19.7% in just 63-days. This followed the mid-2009 signal off the bear market low.

The worst return was a loss of 12.1% following the 1990 signal.

The average MAE is a drawdown of 3.6%.

The maximum MAE was a loss of 13.7% following the 1990 signal, which was also the worst return resulting in a loss of 12.1%. Also noteworthy was the 13.3% MAE following the late 1969 signal. That resulted in a loss of 8.11%

27 of the 36 signals, 75%, gave us a drawdown of less than 5%.

The Next table shows all 36 signals, MAEs, and summary statistics for your reference. We see an average of 5 Golden Crosses per decade. When the next one happens, it will be the second of this decade.

##### The S&P 500's 36 Golden Crosses. Returns, MAEs, and Summary Statistics.

##### Click to enlarge.

**THE SEASONALITY**

The following chart shows us the average path of all 36 signals following a *Golden Cross.* This can function as road map to help us manage risk in the future.

##### S&P 500's Golden Cross "Seasonality" Chart. Click to enlarge.

The average *Golden Cross* becomes profitable around the 5th day. The profit continues to increase until it peaks around the 30th day or so. Gains then tend to flatline until around the 46th day. From there, our gains, on average, continue until we sell into strength at the open on day 64. What an ideal picture.

**IMPORTANT TAKEAWAYS**

Here is one last chart. This chart shows the distribution of the MAEs of the 63-day holding period. Since controlling risk is job number one, let’s take closer look at the risks associated with getting long the day following a *Golden Cross* on the S&P 500.

##### Distribution of MAEs and Summary Statistics. 63-day hold. Click to enlarge.

Looking at the 63-day distribution of returns, several charts above, and looking at the 63-day distribution of MAEs, directly above, we learned the following:

The average gain after a holding period of 63-days was 4.2%, and the signal was positive roughly 78% of the time.

The average MAE is 3.56%. Impressively, 27 of the 36 Golden Crosses, so 75% of them, had drawdowns where we didn't trade below 5% of our entry. 23 of the 36 signals, so almost 64%, had a drawdown less than the 3.56% average MAE.

While those stats are impressive, at least to me, the generated optimism is worth tempering by noting that 9 of the 36 signals, 25%, had more significant drawdowns. Those include 4 drawdowns ranging from losing 10% to 14%. Also, at the end of the 63-day holding period following the 1990 signal, we were left with a loss of more than 12%.

Hopefully, considering the statistics of historical *Golden Crosses* on the S&P 500 has been informative and interesting. Let's see if understanding the probabilities of price action following *Golden Crosses *of the past, as well as using the “Seasonality” roadmap, will help us be profitable when S&P 500 triggers its next *Golden Cross.*

As always, thank you for reading. Please reach out with any and all feedback and comments. I would love to know your thoughts. __Louis@eastcoastcharts.com__

This article is for educational and informational purposes only. The author may or may not have a position in the securities mentioned. __Read our full disclaimer here.__

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