Death Crosses will Kill your Portfolio

Listening to Death Crosses Could be the Death of your Portfolio

This week I decided to go through the process of looking over our old articles, and seeing if there were any that we might be able to improve with some of the new features that have been added to the program since their original publication. Well, the first article I found was our “Death Crosses Don’t Work” article, which takes a look at a short/sell indicator and how it could be detrimental to your portfolio if you use it.

The Death Cross is simply a point in time when the 50 day moving average moves below the longer term 200 day moving average. It suggests that the company’s stock is losing momentum and may actually reverse soon.

Our last article, though conclusive and well thought out, was written before the addition of weighted portfolios to our system. With that addition we are able to actually simulate short strategies and ideas far more closely.

Let’s set up the Screen

The screen is incredibly simple; we look for companies that have just exhibited the death cross which have a market cap over $3 billion. This will make shorting a lot easier.

Here is what happens when we backtest this as a long strategy. It actually makes money over the past four years, although sporadic, this doesn’t tell me that it’s going to be a good short strategy.

Adding Weights

We will need to use two new tabs

  1. Position_weights
    1. Sets up the weight of each position in my portfolio. In this case, we are going to use a weight of -1 because we are shorting a strategy.
  2. Cash_weight
    1. Sets up how much cash is needed to be held in the account to help negate risk. The standard weight here is 2*|portfolio_weights|*Number of Matches

This strategy does nothing but lose money, just as I thought, and confirming the conclusions drawn in the last article. Over the past four years, shorting stocks that just entered into a death cross has done nothing but lose money – though it does seem to be a consistent loss..(tax writeoff?) But past that this is not a “strategy” that I would implement in your portfolio.

It May be the Rebalance

In an attempt to make this simulation as close to how technical traders trade, I set the rebalance period to daily originally, but maybe it takes a while for the death cross to actually affect the company’s share price.

That’s promising; you lose a lot less money over the past four years if you change the rebalance period to weekly.

Well that throws that theory out of the window almost immediately. I jumped the rebalance period up to once/quarter, and your portfolio would do absolutely horribly if you sat and waited for any real period of time for the death cross to take effect. It seems that if you want to lose money you should go with this strategy, but if you’re like the average investor, I would stick to looking at what makes the company a successful company and not worry so much about what lines the chart crossed.

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