Dow Jones calls large-cap ‘dead cross’

Here’s one for the technical analysis fans: U.S. large cap stocks are set to tank. That’s according to Dow Jones Indexes, which found the market has hit a “dead cross” using a quantitative rules-based algorithm

As a result, the company says it will “gradually decrease” the equity allocation in its Dow Jones Golden Crossover U.S. Large-Cap Total Stock Market Index.

How much of a decrease? It’s paring its exposure from 100% to 25%. How gradually? Within the next five days, at which point the index will have a 75% exposure to short-term U.S. T-Bills.

The “dead cross” indicator refers to a market’s 50-day moving average crosses below its 200-day moving average.

“Based on a risk-based methodology, the index is designed to dynamically reallocate component weights between an underlying equity index and a cash index according to the occurrence of ‘golden cross’ and ‘dead cross’ signals,” the company explained in a press release this morning. “During dead cross periods, a portion of the index is allocated toward the underlying equity index and a portion toward the cash index; during golden cross periods, the index tracks only the underlying equity index.”

Dow Jones claims this strategy beat the long only Dow Jones U.S. Large-Cap Total Stock Market Index by 444 basis points (annualized) during the “golden cross” period between December 31, 1999 and June 30, 2011. Over the same period, the strategy reduced volatility by 5.97 percentage points.

Staff

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