Foreword from dshort: In this commentary, Georg Vrba focuses on a less commonly appreciated aspect of moving average signals. We normally focus on the point of crossover, which is explicit in the signal terminology (e.g., Golden Cross, Death Cross). But Georg calls our attention to the peaks and troughs of the spread between the moving averages. The implications of this shift in focus are quite astonishing.
In my article The Ultimate Death Cross – False Harbinger of Doom I showed that it is virtually impossible for the 50-month moving average (MA) of the S&P to move below the 200-month MA in the foreseeable future. The difference between these moving averages – the spread – must be less than zero for an ultimate death cross to occur. Also in the referenced article I demonstrated that the spread will form a trough before the end of this year, irrespective of the level of the S&P over the next few months. This event provides a positive outlook for the stock market.
The table below has the dates when the spread made a trough in the past and shows the subsequent returns for the S&P. On each occasion the trough was followed by substantial gains. All data is from Robert Shiller's monthly S&P data series.
Similarly, when the spread peaked the S&P has subsequently always lost value, as shown in the next table.
If history repeats itself we can look forward to good gains for the S&P starting late this year or early in 2013.
Georg Vrba is a professional engineer who has been a consulting engineer for many years. In his opinion, mathematical models provide better guidance to market direction than financial “experts.” He has developed financial models for the stock market, the bond market and the yield curve, all published in Advisor Perspectives. The models are updated weekly. If you are interested to receive theses updates at no cost send email request to email@example.com.