10 mo SMA Method In Down Markets

By Charles Boccadoro

From the Mutual Fund Observer discussion board, March 2013

In the post 10 mo SMA Method Applied To D&C Funds, Andrei and Investor generally felt the results were overly influenced by the 2008 crisis and wondered how Flack’s simple timing method would perform during other drawdowns. I shared their curiosity and looked back at the past 7 down markets, defined as SP500 being down 15% or more. For this analysis, instead of using exchange traded funds, like IEF and SPY, or a specific traditional fund pair, like DODIX and DODGX, I used SP500 TR and the Barclays Intermediate Treasury TR Index, which dates back to Jan 1973.

Before presenting lifetime results, which once again are strongly in favor of the timing method, I want to focus on the 7 drawdowns:


The 10 mo SMA approach mitigated all losses, except for the short-term drawdowns, like Andrei suspected, in ’98 and ’90, which lasted only 5 and 9 months, respectively. There was simply no protection during these sudden drawdowns, other than not being in the market…or, having wisdom and ability to just ride them out.

In fact, in the four down markets where the descent or ascent was less than half the 10 month averaging period (I suppose a kind of folding frequency criteria), the 60/40 equity/bond fixed method provided the most protection.

The 10 mo SMA method protected best when the periods were longest, like ’74, ’02, and ’08. It also shortened the worst drawdown durations substantially. For the past 40 years, the longest drawdown for SP500 was 72 months, for 60/40 fixed was 50 months, but only 27 months for 10 mo SMA timing method.

Here is lifetime performance comparison:


Comparison over 435 3-year rolling and 415 5-year rolling periods:


Here are the timing and lifetime growth charts:


Finally, here’s growth comparison on log scale to get better appreciation of behavior in earlier years. In addition to larger lifetime growth, the curve shows the timing method provides straightest curve…translation, most consistent return:


The analysis does point out the Achilles’ heel of the method, which we saw some of in the first post Flack’s SMA Method when examining selling short instead of switching to bonds. Basically, if the market movements are too sudden compared to the averaging window, the method cannot be responsive enough. It can experience a quick fall and miss a quick rise. If these quick movements persist, the method can get out-of-sync (phase) with the market, which can result in under performance compared to fixed portfolios.

But since 1973, it has delivered FCNTX-like 12.1% annualized returns with DODBX-like volatility.

I remain very impressed and have decided to start employing Flack’s suggestion on a portion of my portfolio, basically, for a D&C account holding. On a monthly basis, when DODGX is above its 10 SMA, I will have 75% in DODGX and 25% in DODIX. When it is below, I will reverse and have 75% in DODIX and 25% in DODGX. Not quite the all-in/all-out approach like the cases analyzed, but right for me at this time. Will compile results starting next Monday as best I can and post periodically how it’s doing.

Here is link to original thread.

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About Charles Boccadoro

Charles Boccadoro, BS (MIT), Post Graduate Diploma (von Karman Institute, BELGIUM). Associate editor, data wizard. Described by Popular Science as “enthusiastic, voluble and nattily-dressed,” Charles describes himself as “a recently retired aerospace engineer.” He doesn’t brag about a 30 year career that included managing Northrop Grumman’s Quiet Supersonic Platform and Future Strike Systems projects, working with NASA and receiving a host of industry accolades. Charles is renowned for thoughtful, data-rich analyses and is the driving force behind the Observer’s fund ratings and fund screeners.