A Classic Market Timing Rule: Does it Still Work?
The golden cross strategy is probably the most widely known market timing tool. It looks at 2 moving averages in order to make buy and sell decisions.
The commonly used moving averages are the 50 day and 200 day where a trader is bullish when the 50 day average is above the 200 day and bearish when below the 200 day.
In this post I investigate whether this rule has worked in recent times on the Nasdaq 100 Index.
Here is a graph displaying the 50 day EMA and 200 day EMA. It is bullish when the orange line is above the blue line:
Backtest on Nasdaq 100 Index
Here are some variations of the system backtested from 1990 to 2024. We will test 6 systems:
- 50, 200 day simple moving average
- 50, 200 day exponential moving average
- 10, 40 week simple moving average
- 10, 40 week exponential moving average
- 2, 10 month simple moving average
- 2, 10 month exponential moving average
As we can see the Simple Moving Average system using daily bars (2nd column) has better performance and risk measurements than the exponential. It is also better than the weekly and monthly bar frequencies. Below is the backtested equity curve of this system as well as the underwater (drawdown) graph). Green line is the system and red line is the benchmark.
Conclusions
For such a simple and crude investment rule, it has been remarkably good at avoiding the massive drawdowns that were present in buy-and-hold while at the same time achieving a higher return than buy-and-hold.
The system, however, is not what I would consider to be usable in its raw form – its performance is still a bit ‘lumpy’ and has more volatility than I would like. Stay tuned for future analysis/posts where I will look into filters that can be applied to make improvements.
Excel Spreadsheet
I’ve created a spreadsheet where you can play with the lookback parameters for the fast and slow moving averages and generate backtested equity curves. Enter your email below to download:
