Market Timing with the S&P 500 Golden-Cross and a Recession Indicator

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The methodology behind the “golden-cross trigger” is perceived by many as a reliable guide to equity investment. But it is not that good – since 1990, there were many periods when it would have been better to ignore the signals from this trigger.

One can do much better with a simple improvement to that trigger by including signals from a recession indicator, such as the Conference Board Leading Economic Index (CB-LEI). This reduces the number of trades and produces higher returns.

In this analysis, I used the six-month smoothed compound annualized growth rate of CB-LEI as a recession indicator. The CB-LEI is not a secret dataset to which only I have access, but it does cost $250 to purchase the index. The formula to calculate this growth rate is given in Appendix 2 of my 2012 article, Evaluating Popular Recession Indicators.

The normalized growth rate of this index from 1969 to 2020 is shown in Figure 1 and is warning of an oncoming recession.

But do not panic.

This indicator has had three false-positive signals, so, in accordance with the strategy described below, we have to wait for a death-cross signal from the S&P 500 to exit stock market investments. The next update of CB-LEI is scheduled for February 20, 2020.