Timing the Nasdaq Composite

12-Month simple moving average on the Nasdaq Composite back to 1973. Very similar results as most of the other assets classes we have tested. Increase in return, volume drops about 30%, and drawdown gets cut in half.

Data from Yahoo.

Log Chart:

Non-log Chart:

Comments

[je:]

What the hell are you talking about?

Mar 20 09:36 AM

[cyclingscholar:]

He is talking about a moving average trading strategy where the investor buys the QQQQ when it is above its 12 month MA and sells it (goes into cash) when it falls below the MA. He then compares the performance of your portfolio with that of the underlying index.

As is usually the case with MA models you lag the market...but you do capture the big up moves, miss the big down moves; so adjusting for risk your performance is quite impressive.

Mar 20 10:53 AM

[Dean Morel:]

<i>Increase in return, <b>volume</b> drops about 30%, and drawdown gets cut in half.</i>
Mebane, did you mean volatility?

Mar 20 05:08 PM

[WorldBeta:]

Yes, Seeking Alpha edited my post (annoying) and somehow interpreted vol(atility) as vol(ume). Original is here:

www.mebanefaber.com/20.../

Mar 23 09:17 PM

[CPWalmsley:]

Mebane, love your work and look forward to getting your book!

Question, when using your SMA strategy, what if you use individual sectors (ETFs primarily)? How would you rebalance such a portfolio?

I guess this would be the same question if you were using individual stocks. Let's say I have 10 stocks that comprise 10% of the portfolio each. If the SMA trend calls for 3 of these stocks to liquidate to cash, and I let the other 7 ride the momentum, when 1 of these cash positions says to get back in, how do I determine the amount of that position?

It seems the SMA strategy works when you have just a few investments (SPY, QQQQ, a REIT, etc) but gets quite complicated when handling a 10-15 security portfolio.

Thoughts?

Mar 27 10:39 AM

[CPWalmsley:]

Mebane, love your work and look forward to receiving your book!

Quick question... using the SMA strategy works great when you have relatively few investment options in your portfolio, but how do you handle rebalancing with 10+ positions?

Let's say I build a portfolio that uses sector ETFs and has 10 equity positions, 10% each. If I use the SMA strategy to move in and out of classes, how would someone go about rebalancing such a portfolio when some positions are naturally going to be in cash, and other positions are going to be riding strong momentum?

For example, if 1 of those positions is still showing "hold" status, but now has grown to 15% of the portfolio, do you wait until a sell to cash to rebalance the position or simply ignore rebalancing altogether?

Thoughts?

Mar 27 10:46 AM

[CPWalmsley:]

Sorry for the double post! Didn't think it took the first one since it didn't show up upon refresh... ;)

Mar 27 10:47 AM