A New Moving Average System for ETF Portfolios

I recently wrote an article on the importance of diversifying portfolio strategies and not just assets. As I plan on doing periodically, I will provide additional strategies an individual investor could easily employ when determining buy and sell signals such as ones already discussed here and here.

One twist on the moving average systems we discussed in the first article is a moving average crossover system. This system is detailed well by QVM group as a tool for identifying long term trends. They explore a few different systems, one in which "the 26-week average crossing the 52-week average serves as signal for trend changes from up to down, or down to up, cycles." They also discuss the 40 week crossover which is just a basic price crossing above/below the 40 week moving average as the signal, similiar to the one I've detailed numerous times.

They also analyze a different system which I think could offer diversification from a basic 200 day crossover.

The 40-week/20-week combination creates more (earlier) signals than the 52-week/26-week combination, but avoids most of the frequent and false signals of the 40-week/price approach....If you become strenuous for long position entry, and require that the longer average be flat or sloping up, as well as that the shorter average is above the longer average, and that the price is at or above the moving averages, you get very few signals, which is good when seeking multi-year trends. And if, you use the reverse of the criteria for exits, you get few exits (at least in the past 20 years).

Of course, there is no guarantee this will continue in the future which is why I advocate using multiple strategies for investors whose accounts are large enough to absorb the added transaction costs.

To summarize, the investor buys the stock when all of the following conditions are met:

1. Stock price>40 week moving average
2. Stock price>20 week moving average
3. 20 week moving average>40 week moving average (crossover)
4. 40 week moving average is sloping up (previous days average)

The portfolio is listed below with the moving averages and the slope of the 40 week average (note these are weekly numbers, so there could be variation from daily averages). I've changed the system slightly to use exponential moving averages instead of simple moving averages in order to place more emphasis on recent data.

Of note, VTI has been on a sell January 2008 and VNQ, the REIT index, since 7/16/07. BND is the only ETF on a buy signal. In addition, this limited sampling shows some of the limitations of this system. DBC moved so quickly down in 2008 that there was a significant lag time for the 20 week average to cross the 40 week.

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