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Death Cross Preview

|Includes: SPDR S&P 500 Trust ETF (SPY)

It is almost a mathematical certainty that the S&P 500 will experience a "death cross" within the next few trading days (even a flat close on Friday would get us there). A death cross occurs when the 50 day moving average moves below the 200 day moving average.This is an important sell indicator for many trend followers as it confirms negative action and sentiment in the market. Over the last 30 years there have been thirteen death crosses in the S&P 500. The table below details the market's 1, 6 and 12 month returns following each of the death crosss. (All performance figures are based on nominal returns of the S&P and as such do not consider the effect of dividends).

Date 1 Month 6 Month 12 Month
7/2/1981 1.8% -4.7% -15.5%
2/3/1984 -1.9% 0.9% 11.0%
11/18/1986 4.6% 17.5% 2.6%
11/5/1987 -12.0% 1.2% 9.7%
2/27/1990 3.4% -2.7% 9.9%
9/7/1990 -3.7% 15.9% 20.3%
4/19/1994 2.5% 5.7% 14.1%
9/29/1998 1.6% 22.6% 20.9%
11/4/1999 5.2% 5.1% 4.8%
10/30/2000 -4.5% -9.4% -21.2%
8/18/2004 2.6% 10.5% 11.4%
7/19/2006 2.8% 13.5% 21.8%
12/21/2007 -9.8% -11.5% -41.3%
Average -0.6% 5.0% 3.7%
Median 1.8% 5.1% 9.9%


I would expect that most trend followers do not keep a position for a set calender time just because an indicator goes negative. The table below shows the maximum drawdown in the S&P 500 after a death cross, the number of days such a trader would be out of the market assuming they only buy back in after the 50 day average goes back above the 200 day (a "golden cross"), and the net move in the S&P 500 from the time of exit until reentry.

Date Max Drawdown Days Out Reentry
7/2/1981 -20.4% 453 -4.2%
2/3/1984 -8.1% 222 2.3%
11/18/1986 0.0% 7 4.8%
11/5/1987 -12.0% 236 7.0%
2/27/1990 -0.3% 87 7.4%
9/7/1990 -8.6% 161 14.1%
4/19/1994 -0.2% 149 7.3%
9/29/1998 -8.5% 70 12.6%
11/4/1999 0.0% 7 1.4%
10/30/2000 -44.5% 926 -32.8%
8/18/2004 -0.4% 79 6.5%
7/19/2006 -1.5% 55 4.2%
12/21/2007 -54.4%            550 -39.1%
Average -12.2%            231 -0.7%
Median -8.1%            149 4.8%


It takes just a cursory analysis to see that most trades based on the "death cross" are losers whether done on a calender or rules based reentry system. However there is a significant variance within the trades as a majority exhibit mosly mild to moderate losses but a few trades show significant gains (greater than 30%).This is indicitive of trend following systems in that they helps an investor avoid the absolute worst depths of a bear market but can often get whipsawed by a choppy or flat market.



Disclosure: Not Long SPY but long comparable securities along with clients