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Methodology points to 100 per cent stock allocation Add to ...

Feeling bullish? The Dow Jones Golden Crossover U.S. Large-Cap Stock Market Index certainly is. The index uses a quantitative and rules-based algorithm to decide on allocations between stocks and cash (or U.S. Treasury bills). Until recently, the methodology had put the index’s stock allocation at just 25 per cent, versus 75 per cent for T-bills. Over the next four days, though, the stock allocation will rise to 100 per cent.

The switch relates to the so-called Golden Cross, a technical formation where an index’s 50-day moving average rises above the 200-day moving average – which some investors believe is a flashing signal that bullishness is in order.

Major indexes, including the S&P 500, flashed a Golden Cross earlier this year. But apparently the trigger for the Dow Jones Golden Crossover index is only now being recognized, even though the S&P 500 has risen nearly 8 per cent since its Golden Cross appeared near the end of January. Similarly, the Dow Jones U.S. Large Cap index has risen more than 8 per cent since its Golden Cross appeared in January.

No matter. The folks behind the index stand by their methodology, pointing to its performance over the past decade in a press release: “As a result of the systematic application of the Golden Crossover system, from December 31, 1999 through December 30, 2011, the Dow Jones Golden Crossover U.S. Large Cap Total Stock Market Index outperformed the Dow Jones U.S. Large-Cap Total Stock Market Index (its ‘long only’ benchmark) by 3.85 percentage points and reflected reduced volatility by 6.13 percentage points, with both measured on an annualized basis.”

Still, they caution that “moving average crossover systems are intended to identify the change in market trends, not predict the tops and bottoms of the market.”

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