Here's an interesting analysis of stock market timing by Wayne Whaley. He looked at using moves above and below certain moving averages as a basis for timing the stock market. Here are his rules:
and this is a summary of his results:
- I analyzed data for the 40 years between 1970 and 2009. Moving averages in 1969 were calculated to initialize the first day’s trade.
- If you are short, go long the S&P 500 cash index at the close of that business day when the S&P 500 closes 1% above the n-day moving average. Since this is a long-term trading system, the 1% filter is used to avoid annoying day-to-day whipsaws on penny moves.
- If you are long, cover and go short the S&P 500 when the S&P 500 closes 1% below its moving average.
- Evaluate the performance in terms of average annual percentage return.
He notes in his conclusion:
When measured solely on total return, the 200-day moving average crossover trading strategy has some utility as a trend-following system, but its total return (9.2%) is comparable to the return of the S&P (8%) over this time period and actually under the S&P buy & hold plus dividends (11.5%) return.
It's a useful take-away that the 200 day is the most useful average, but in my view the analysis understates its value. The key point is that strategies like this protect you from downside volatility, so your risk adjusted returns increase.
At some time, I'll come back to this subject with some analysis I did on the first half of the last century. That was a period when being protected on the downside was more valuable than in the period covered by Whaley's study. Partly as a result of this analysis, the 200 day MA is incorporated in a lot of my strategies.
Meanwhile, we should not forget that the Shanghai stock exchange has recently cut below its 200 day MA. In the future, we may see this index play the role of leader in global stock markets.
Disclosure: None relevant