On Friday, Microsoft stock had a golden cross. A golden cross is when a stock’s 50-day moving average crosses its 200-day moving average from below. This is usually interpreted as a positive sign for the stock. Conversely, a death cross is when a stock’s 50-day moving average crosses its 200-day moving average from above.
I decided to investigate whether or not this would be an effective strategy when trading Microsoft stock. To do this, I looked at its twenty year historical data and calculated each time the stock’s 50-day crossed its 200-day, both from above and below. I used a mechanical entry system – buy signals would be whenever the Microsoft had a golden cross based on the closing price, I would buy on the next day’s open. Exit signals were when the stock had a death cross, I would sell on that day’s close price.
As it turns out, the death and golden crosses pattern is not so golden. Out of the 15 entry signals given, only 6 were profitable. Moreover, 6 of the past 7 golden crosses with death crosses as the exit have had negative returns. However, had you invested $10,000 in Microsoft on December 15, 1986 (the date the first 50-day moving average was above the 200-day moving average for which we have data) and took all the entry/exit signals (the last being March 10, 2006), you would currently have $648,313. However, your account would have steadily decreased since April 18, 2000. There, the peak of your account would have been $1,083,188. Using this market timing strategy you would have lost 39%.
Furthermore, this strategy underperforms a straight buy-and-hold strategy. If you bought $10,000 of Microsoft stock on December 15, 1986, you would currently have $1,771,982. That’s nearly triple the market timing strategy. Your peak on April 18, 2000 (vs the market timing strategy) was $2,409,309. That is a loss of only 25%. So, buy-and-hold on Microsoft stock beats using golden/death crosses as entry/exit signals.
Compared to the entry/exit points of the market timing strategy, the average drawdown in the nine negative periods is -9%. For the buy-and-hold, there are only two losing periods but their average drawdown is -30%. That’s huge. So, the timing strategy returns less but is a smaller roller-coaster ride (ie, your losses are smaller between timing periods).