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The SPX is going to experience a Death Cross today at the close. I’ve written many times in the past about “Death Crosses”. A Death Cross is when the 50ma crosses below the 200ma. It is confirmation of a downtrend. Some people view it as a bearish signal. As you’ll see, it is not a great “signal”. My Norgate data goes back to 1928 for SPX (this includes its predecessor, the S&P 90, from 1928 – 1957 when the S&P 500 officially began). This made for an interesting starting point, because the 1st instance, in 1929, came shortly after the 1929 market crash that was followed by the Great Depression. It was also followed by the most substantial decline – by far. Let’s first look at a list of all the Death Cross formations and how the SPX performed while they were in effect.
Interestingly, 36 of the 49 instances (73.5%) actually saw the SPX realize gains while the Death Cross was in effect. The problem is the losing trades were very large. And even most of the winners saw a sizable round-trip lower before they were able to carve out some gains (like the last one in 2022). The average drawdown for these 49 trades would have been 13.2%. And there were 5 separate instances that saw drawdowns of at least 45% .
Even though the giant losers were relatively rare, their impact is large. And the fact that the 1st instance was the worst instance also provides a great example of how devastating large drawdowns can be. The profit curve below shows a hypothetical portfolio of only being invested in the market during SPX Death Crosses.
The 1st instance from 1929 – 1933 saw the portfolio rise to $120k before falling down as low as about $20k and then finishing that trade with a value of about $34k. And it has never managed to get back to breakeven. The 73.5% “win rate” on the Death Cross tells me it is NOT a reliable timing device. But the few instances of massive losses show just how valuable it can be to protect gains and avoid large portions of nasty bear markets. If we get into a big bear market, I won’t actually be sitting out of the market for several years. But it does allow us to adjust strategies, exposure and other risk parameters. The Death Cross / Golden Cross on its own is not a great system. But it can help us put the market into a context where we can better evaluate opportunities. And I have also found it helpful when combining with other timing indicators, as I’ve done in the Market Timing Course.
Note: The Quantifiable Edges Market Timing Course does look at the Golden Cross / Death Cross in combination with other timing indicators.
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I have shown many times in the past that Fed Days tend to carry a bullish edge – especially when there is selling leading up to the Fed Day. Tuesday’s selloff saw SPX close down over 1% and in the bottom half of its intraday range. I looked at this combination in the study below.
Those are some impressive stats over the next few days. I also produced the 3-day profit curve.
That is a persistent move from lower left to upper right, serving as some confirmation of the upside edge suggested by the stats table.
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In this weekend’s subscriber letters I examined some Inauguration Day ideas. I wondered whether a new president brought about new hope and optimism for the market.
I limited the instances to only those inaugurations where a new president was entering office. I don’t think re-elections carry a sense of “new hope” the way a new president does. I also eliminated inaugurations of Presidents that weren’t elected (Ford in ’74, Johnson in ’63, Truman in ’45, and Coolidge in ‘23). I just don’t believe the same sense of excitement is generated by a replacement as by a newly elected president. The remaining presidents and their inaugurations can be found in the table below.
First, I found it interesting that the wonderful speeches and overall positive vibes surrounding a new president did NOT translate to a strong Inauguration Day performance. (You could throw out Roosevelt and G.W. Bush here, since the market was not open on the days they were giving their speeches. Same with whatever happens Tuesday since Trump will be inaugurated with the market closed on Monday.) I’ll also note that Donald Trump could (and certainly would) claim he gave the greatest Inauguration Day speech of the last 100 years back in 2017, since the 0.48% rise on that day was the best of any president on the actual Inauguration Day. It could also be claimed that Obama gave the worst speech in 100 years, since the Dow tumbled 4% on the day of his inauguration.
I’ll also note that looking out over the next 10 and 75 days the market did often seem to embrace the new hope that comes along with a new administration. Harding in 1921 is the only one on the list that saw the market more than 3.5% lower 75 days out. Meanwhile, there were 7 instances where the market was more than 3.5% higher. Biden had the best 75-day performance since Roosevelt in 1933. It is tough to draw conclusions based on just 14 instances over a 100+ year period. Also, some might consider Trump to be a “2nd -term” president. While it is his 2nd term, and he is not eligible for another, he is elected, and it will be a new administration from the previous 4 years. So I’d view it more similar to a 1st term than a 2nd term from a seasonality perspective. With 11 of the last 13 instances showing gains, and most of them strong gains, we may have some positive seasonality helping the market along the next few months.
Notable about Friday’s action is that the Quantifiable Edges Capitulative Breadth Indicator (CBI) rose to 10. I have generally viewed 10+ as strongly bullish over the years. The chart below shows SPX in the top pane and the CBI in the bottom pane. Whenever the CBI reached 10 or higher initially during a spike, I have marked that with a vertical line on the chart.
As you can see, over the last 3 years, CBIs of 10+ have quickly been followed by a bounce. Of course it isn’t just the last 3 years that the indicator has been helpful.
The study below is one I have shown many times before. It looks at SPX performance if you were to buy the index when the CBI reached 10 or higher and then sell when it returned back down to 3 or lower. Results are updated.
The COVID Crash in March of 2020 accounted for most of the gross losses. Other than that instance, the strategy would have performed very well over the years. And the last 9 instances have all closed higher, making for a nice run since the start of 2022.
Overall, the last day of the year used to be consistently bullish for the market. But that has changed since the turn of the century. This is true across a number of indices. The most dramatic example is the NASDAQ, which I highlighted a few years ago. I have updated the chart below.
Closing up 29 years in a row is fairly astounding. Just as astounding is the abrupt changes in behavior we have seen. I have no good explanation for why such a formerly consistent edge changed, but it did.
This Nasdaq study is a great reminder though. The market is constantly changing and evolving. 2025 is just a few trading hours away. I’m not sure what it has in store for us, but I know it will play out in its own unique pattern. We will see clues along the way, and many of the truisms we’ve identified through studies over the last 17 years at Quantifiable Edges will continue to work. But some may flounder. And when something stops working, like the “last day of year bullishness” above, then I will do my best to recognize it early. Examining edges is more than just running numbers. Researchers and traders need to keep an open mind, understand the market is continually evolving, and adapt.
