Testing Ablin's Trend Following Strategy

This is a quick test of a Jack Ablin strategy shared over at the Big Picture.  To be fair, I can’t find where Ablin originally discussed this strategy, so I don’t know what context he put it in, but the rules appear to be to go long the S&P 500 when it closes more than 5% above its 200-day moving average and hold until it breaks 5% below its 200-day MA.  See graphic from Ablin:

Click to enlarge

For comparison’s sake, I’ve also included a simpler strategy in this test: buy when the S&P 500 crosses over its 200-day MA and sell when it crosses below. 

The results for Ablin’s strategy (red) and the simpler version (green) trading the S&P 500 frictionless and with no return on cash from 1951:

[logarithmically-scaled]

And for the number lovers:

With the exception of the very narrow window of time from Ablin’s original graphic the super simple strategy outperformed both Ablin’s variation and the broader market. And this is a good example of the problem with drawing conclusions from just part of the story. 

Which one is going to be better tomorrow?  I have no idea.  But I have a sneaking suspicion that the 5% bands were added because without them the strategy would have entered and exited the market prematurely quite a few times over the last 10 years (and that’s never good for impressing people).  But armed with the bigger picture over the last 50+ years, I would guess that most folks would wager that the simpler strategy stands perhaps a better chance of prevailing in the future.

Comments

[kotika98:]

i've tested other, slightly more sophisticated momentum stuff, and it works wonderfully between 1950 and 1990, but whiplashes too much in the era since 1990. It is well known that momentum works better in the commodities markets... anyone can get some data on whether the performance of momentum has deteriorated or not in the commodities fuures markets?

2008 Nov 18 08:49 AM

[Augustus:]

The difficulty that the individual has in using the 200 da cross over strategy are shown in the graphs. There are years and years of under performance. Then the "big one" happens and the market does make a large drop that is avoided. In general, this can go along for 10 to 20 years with the B&H outperforming the timing because of the whipsaws. So the investor endures small annual underperformance while telling themselves that there will one day be a crash that they will avoid.

2008 Nov 18 09:01 AM