There are many indicators or patterns that try to predict whether the stock market is going to crash or rise. Today we will be looking at one that generated few signals over the years, but anticipated major bear markets. It’s called the Kiss of Death trading strategy.
The Kiss of Death is a strong sell signal in the S&P 500 that has a history of anticipating major bear markets. It triggered only a few times in history but with an impressive track record. Â
In this article, we are going to look at what the kiss of death is, backtest a trading strategy and see how profitable the kiss of death signal and strategy is.
Related reading: – Different types of trading systems
What is the Kiss of Death?
The Kiss of Death is a sell trading signal that flashes when the S&P 500 drops from an all-time high and drops below its monthly 21 exponential moving average (EMA), then bounces back above its 21-EMA and subsequently drops below its recent low (the low it made just before the bounce).
The signal has been triggered only a few times in history. Since 1960 it has happened in 1969, 1973, 1978, 2001, and 2008. In all cases it anticipated major crashes and bear markets.
For example, in September 2008 the kiss of death signal triggered (as described in the chart below) and the S&P 500 proceeded to crash the following months, not bottoming until March 2009.
Now, the signal triggered again in September 2022 but did not result in a huge drop afterwards. On the contrary, the S&P 500 went up and hasn’t stopped since then. As we can see in the following graph, right after the signal is confirmed the S&P 500 skyrocketed:
So although the pattern proved to be successful in the past, it does seem to generate false signals as well. There is no foolproof trading strategy! Nonetheless, we are going backtest the trading strategy to see whether the false signals affect the performance of the Kiss of Death strategy or not.
Kiss of Death trading strategy – trading rules
Based on the Kiss of Death description we did earlier, the trading rules of the signal are pretty simple:
- We sell the S&P 500 when kiss of death signal triggers, and
- We buy back when the S&P 500 closes above its 10-month EMA.
There is no universal condition or pattern established about when to re-enter the market. We chose the 10-month EMA because it performed generally well.
Kiss of Death trading strategy – backtest and performance
We started the backtest in 1967 using the S&P 500 index. The data is not adjusted for dividends. Here is the equity curve:
The equity curve looks great because we avoided most of the severe drawdowns. When you avoid major drawdowns you can start compounding from a higher level when the dust settles (read here for what is drawdown in trading).
Here are some performance metrics and statistics:
- CAGR is 9.08% (buy and hold 7.11%)
- Time spent in the market is 87.88%
- Risk-adjusted return is 10.33%
- Maximum drawdown is 30.17% (buy and hold 52.56%)
As you can see, trading the Kiss of Death improved the performance of buying and holding the S&P 500. The CAGR is higher and, more importantly, the maximum drawdown is reduced to almost half.Â
Kiss of Death trading strategy – conclusion
To sum up, the Kiss of Death strategy has indicated a strong sell signal before market crashes. We backtested the strategy and found that it improves the buy and hold performance. If you are a conservative investor that cannot take huge losses, it may be worth implementing into your system.
