Guest Post: From Golden Cross to Golden Goose?

Submitted by Leo Kolivakis, publisher of .


My favorite strategist, Martin Roberge of , sets the record straight on the Golden Cross in his latest strategy comment:

Much has been said about the positive implications of this week’s Golden Cross (GC) on the S&P 500. However, little emphasis has been put on downside risk analysis. Even though GCs have normally preceded periods of above-average stock market performance, history also reveals that important pockets of market weakness remain. In fact, our analysis suggests that despite this week’s GC, odds of a re-test of March lows should not be taken down to zero. A re-test is not our baseline scenario, but we wanted to set the record straight as far as the GC is concerned.

A GC occurs when an index’s 50-day moving average (MA) rises above its 200-day MA. This event occurred Tuesday on the S&P 500. Since the GC is of a declining 200-day MA, we looked at the implication of such a cross in terms of forward stock market performance. We also screened for episodes when the GC occurred through a recession as identified by the NBER. The forward performance of the S&P 500 appears in Exhibit 2 next page.

Key observations are: 1) returns are positively skewed, with a one-year increase of 12.9% on average, 2) when the GC occurs through a recession, the average return jumps to 26.4% vs. only 2.1% for the no-recession scenario, 3) through a recession, the S&P 500 one-year downside risk is -0.6% vs. -18.3% otherwise, 4) intra-year, the downside risk rises to -15.1% under the recession case and -24.0% otherwise, 5) through a recession, the S&P 500 downside risk from the GC level is contained at -4.7% if the 1932 and 1938 experiences are excluded.

However, using daily data, the third panel of Exhibit 1 at right plots the S&P 500 average, minimum and maximum performance path under the recession case. With the index closing at 895 on June 23 (day of the GC), we can see that the 6-month downside risk is located at 783 and then 674 if we follow the path of the 1932 and 1938 GCs.

Bottom line. While the advent of a GC is a positive development for equities, many pundits failed to mention that such a cross does not exclude the possibility of a re-test of March lows. We wanted to set the record straight.

I always tell people to use technical signals as a tool, but never, ever rely solely on technical signals.

Another interesting comment came this week from legendary investor Jim Rogers, who now says:

Investor Jim Rogers said on Thursday that he sees prolonged economic problems and while he did not see much worth buying, he is not shorting any assets either.

He repeated a previous comment that he is selling his U.S. dollars and that commodities were the best investment bet.

“I have no shorts for one of the first times in my life,” Rogers, a co-founder with George Soros of the Quantum Fund, told Reuters TV in Singapore. “On the other hand I don’t see much to buy.”

He said huge borrowing by governments, particularly in the United States and Britain, would hurt their currencies and lead to future problems, though he picked the Canadian dollar as one of the “soundest” currencies.

“I’ve got out of my pounds. I will be getting out of my (U.S.) dollars soon,” he said, repeating his view that commodities were the best place to be, with metals having gained more than stocks this year and long-term potential for soft commodities.

“I’d rather be a farmer than a stockbroker for the next couple of years,” he said. “No-one you went to school with became a farmer… so we have a shortage of farmers.”

Mr. Rogers, who lives in Singapore, co-founded the Quantum Fund in 1970. The fund, since closed, returned 4,200 per cent in the next decade, compared with a 50 per cent gain in the S&P 500 index.

“If you’re in London you’re in the wrong place at the wrong time… You gotta move east.”

I agree with Mr. Rogers, the “golden era” of financial services is over. We entered a prolonged bear market in that industry.

But he must be blinded or biased, focusing just on commodities when he says there is nothing to buy. Go back to read my comment on the to see the key long-term themes you should be focusing on:

  • Inflation/ deflation
  • Alternative energy (solar, wind, nuclear)
  • Chindia (China & India)
  • Demographics (healthcare, biotech, etc.)
  • Infrastructure
  • New technologies (nanotech, etc.)

Of these, I think alternative energy and infrastructure are definitely on a long-term secular upswing.

The OECD reports that the world’s main economies as the way forward out of the current crisis, opening up new prospects for climate-change negotiations ahead of the 15th Conference of the Parties of the UN Framework Convention on Climate Change (COP15) in Copenhagen in December.

Tomorrow I will discuss why smart money is going clean tech. As we wait for the U.S. Senate to , there are tremendous opportunities out there that are worth investing in.

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10 comments

  1. Mike

    And what if the market is "managed" to give these technical signals, to "instill confidence"?

  2. marin belge™

    "he (Rodgers) must be blinded or biased, focusing just on commodities when he says there is nothing to buy. Go back to read my comment on the investment labyrinth to see the key long-term themes you should be focusing on:

    * Inflation/ deflation
    * Alternative energy (solar, wind, nuclear)
    * Chindia (China & India)
    * Demographics (healthcare, biotech, etc.)
    * Infrastructure
    * New technologies (nanotech, etc.)

    An OECD consumer back on earth, an Asia consumer born at last, limited taxation, no massive monetary crisis bringing international security markets to pieces … Suppose the world effectively runs into peaceful time, few problem to follow your argumentation. In case we run into nastier times, Rodgers is much easier to grasp. I'm sorry to say that the current period feel more like the 70s or 30s than the 50s.

    IMHO you just CANNOT run a planet-wise globalized economy without a decent monetary system. What are the chances that we get one within a reasonable timeframe? Things will get worse until they get better.

  3. JP

    I'll take elementary "Low-Pass" filters for $200, Alex.

    [And what exactly does a low-pass filter do to noise in a system? Yep, "golden crosses" are taking advantage of a different mathematically-impaired demographic than the lottery.]

  4. Edwardo

    Jim Roger's must be the world favorite financial blowhard.

    Well, you can have Singapore Jim. Frankly, you strike me as a cultural philistine which explains, among othr reasons, why you so prefer the sterility of Singapore to excitement of London.

  5. "DoctoRx"

    1. Agree w Mike 8:57

    2. If you want a foretaste of the predictive value of this golden cross, look at what happened after BA and NKE had their golden crosses BEFORE the SPY.

    3. Look at the charts and MAs of 4 companies that played it straight and that are unmanaged:
    WMT, COST, CB and NTRS.

    4. If you really believe in this stuff, look at GLD. Now, that's a strong chart from a short, intermed and long-term perspective.

  6. D.B.

    First off, Ill take this whole thing with a grain of salt since for the most part, simple MA's are inherently flawed in a number of ways. For those using EMA's, you will see the cross is not even close to occurring on the SPX

    200 EMA @ 940
    50 EMA @ 898

    Any further comments on this are encouraged…

  7. NotZed

    Of course, the reason nobody became a farmer is because farms have been taken over by corporations who expect people to work for slave wages.

    Which is ok I guess if you're one of those corporations, but for the rest of us it just means more expensive food despite the leaps in production efficiency, and no jobs to speak of.

  8. Todd Wood

    Off topic, but did Chris Hedges article get noticed:

    "Resist or Become Serfs"

    Excerpt: "America is devolving into a third-world nation. And if we do not immediately halt our elite’s rapacious looting of the public treasury we will be left with trillions in debts, which can never be repaid, and widespread human misery which we will be helpless to ameliorate…"

    He is borrowing from Michael Hudson's great analysis in his article.

  9. moslof

    Leo
    I think you should read Socionomics. "Green" thinking is always on the rise during commodity booms. The commodities are rallying but the boom ended in 08. During down economies in the past the environment was the last thing anybody worried about.

  10. TC

    This really is a no-brainer. The more developed commentaries on the Golden Cross (such as the one cited above) are quick to point out the record of this indicator during recessionary periods. We learn it is an incredibly reliable signal of bullish market conditions looking out months forward.

    HOWEVER, THERE'S JUST ONE PROBLEM WITH THIS ANALYSIS:

    We are NOT in a recessionary period. Instead, we are in a state of outright collapse. Those who deny this probably are the same folks who scoffed in 2000 at those calling the "new era" in technology a bubble.

    We are in a state of collapse. The stock market (and equity in general) presently is in its "rearranging the deck chairs" phase. Over the next couple years, the market likely will collapse. Equity is DEAD MONEY. Long live debt. (How many more bailouts do we need to see before this FACT sinks in?)

    Of course, there's no such thing as a "sure thing." However the risk is clear. One might duly note, too, that, denial of this possibility is frightfully pervasive. This, itself, is a huge red flag signaling the risk averse alert investor to remain extraordinarily cautious toward equities…

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