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Fred Piard, Ypa Finance (219 clicks)
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In the article Market Timing: 3 simple indicators that work I stated that three market timing indicators of different kinds may help investors to improve their risk adjusted performance, mainly by cutting the risk factor. A few comments and private messages wondered if these indicators could be combined. This is my answer.

For convenience I will repeat the definitions of the signals:

- "Golden Cross" is bullish when the 50-day simple moving average of SPY is above or equal to its 200-day simple moving average. Else, it is bearish (then called "Death Cross"). It is a technical indicator.

- "EPS Estimate" is bullish when the S&P 500 current year EPS estimate is above or equal to its value three months ago. Else, it is bearish. It is an aggregate fundamental indicator.

- "Unemployment" is bullish when the U.S. unemployment rate is below or equal to its value three months ago. Else, it is bearish. It is a macro-economic indicator.

There are different manners of combining them. The next table shows the results for SPY using the most obvious ones (period: 1/2/1999 - 1/17/2014). Dividends are included.

Timing Indicator

Tot.Return

Ann.Ret.

Drawdown

Volatility

Buy and Hold

95.46%

4.6%

-55.4%

23.8%

Dead Cross

223.5%

8.1%

-17.0%

14.1%

Unemployment

257.5%

8.84%

-27.2%

15.2%

EPS Estimate

273.2%

9.2%

-20.2%

14.6%

One is Bullish

344.5%

10.4%

-23.2%

17.1%

Two are Bullish

340.6%

10.4%

-17.2%

14.0%

Three are Bullish

107.9%

5.0%

-10.2%

8.9%

The "One is bullish" and "Two are bullish" versions give the same annual return, the second one delivering the lowest volatility and drawdown.

"Three are bullish" gives a return barely above "Buy-and-Hold", but it is the lowest risk tactics.

Here is the equity curve for "Two are Bullish" with SPY:

(click to enlarge)

Similar results can be obtained with other ETFs for major stock indexes: DIA for the Dow Jones, MDY for the S&P Midcap 400, IWM for the Russell 2000, QQQ for the Nasdaq 100.

It is also possible to test variations: using the indicators two by two (3 possibilities), with an error margin (for example considering that an indicator is bullish until 0.5% or 1% below or above the limit). The possible combinations can quickly grow up. An in-depth study would be too long here, readers who want to do it can find instructions here, then ask me in private message the code of indicators. I will be happy to give it for free.

Conclusion:

These three indicators, alone or combined, may cut drawdowns and boost the market's long-term total return. The best and simplest way to use them in a recent past was to stay in the market when two are bullish, and go to cash when two are bearish. Simulations are performed on a long period, but a relatively small set of signals: I wouldn't conclude that a solution is much better that others. At the time I write this (1/23/2014 using data on close the day before), the three indicators are bullish.

Source: Market Timing: 3 Simple Indicators That Work... Together