Study: What Happens When A Death Cross Has Occurred For 8 Months

I am building out simple but effective trading models that combine fundamental analysis with technical analysis. Right now I am trying to combine two models into one model that’s more effective (combining the Golden/Death Cross model and the Golden/Death Cross model).

I previously did a study which concluded that the Death Cross isn’t consistently bearish for the stock market. This is because Death Crosses frequently mark the bottom of corrections in bull markets. This is more often a bullish sign than a bearish sign because there are too many false bear signals.

*The “death cross” occurs when the stock market’s 50 daily moving average crosses below its 200 daily moving average.

One of the blog’s readers (Mark) stated:

The death cross is useful if still active after 8 months. This would have prevented the big 50% losses in the 2000-2003 and 2007-2009 Bear markets. Long term Investors would have exited at 1250 in June 2001 and 1300 in August 2008, avoiding the worst of the fall.

In other words, Mark suggested that this simple technical measure could be used to predict the worst of bear markets. Is this true? Does this modified indicator give any false signals? (i.e. “significant corrections” that don’t turn out to be bear markets).

Let’s test out this hypothesis. What happens when:

Here are the historical cases

*You can download the data in Excel here.

Let’s look at these historical cases

August 21, 2008

This modified signal occurred before the worst of the 2008 bear market.

June 29, 2001

This modified signal occurred before the worst of the 2001 bear market.