econorama for today, page-19

June 29, 2009
Green Shoots and a Grain of Salt

John P. Hussman, Ph.D.


Similarly, we are skeptical about things that cross our desks urging us to forget the economy's debt fundamentals and break into a chorus of Zippidee-Doo-Dah. Last week, for example, I was treated to a report on the so-called “Golden Cross” – the event where the 50-day moving average of the S&P 500 crosses above the 200-day moving average.

Next to a carefully compiled set of dates were the purported returns of the S&P 500 over the following 1, 3, and 12 months. As one moves down the report, the analyst either figured that investors would no longer pay attention or forgot how to operate a calculator, so one-year gains of 100%, 200% and more were piled into the average (the figures were about 10 times the true returns).

Suffice it to say that the true history of the Golden Cross is bronze at best, with actual 1, 3 and 12 month gains in the S&P 500 (since 1940) coming in at 1%, 3% and 14% on average. Those figures, however, benefit from three particular instances where the S&P 500 gained over 40% over the following year – those instances were 1942, 1953, and 1982 – each which began at multiples of just 7-8 times normalized earnings (not the current multiple of nearly double that). Excluding those three instances, the subsequent returns from the Golden Cross are no better than throwing dice.

In short, beware of analysts bearing indicators that all is suddenly well, and check their facts.


http://www.hussmanfunds.com/wmc/wmc090629.htm