Posts by Ted, MJG, and Flack on the 200-day Simple Moving Average (SMA) technical signal got me curious:
Hulbert's Test of the 200 Day Technical Signal200 Day Versus 10 Month Moving Averages
And then from 2011:The Effectiveness of Simple Moving Averages
We’ll use a 200-day Simple Moving Average on the SPY (S&P 500 Index Exchange Traded Fund).
We buy at the end of the month when the price has closed above the moving average.
We sell at the end of the month when the price has closed below the moving average.
(Does it get any easier than this?)
Only because the monthly database was readily available, I used the 10 mo SMA, but in the same manner Flack describes. If current month was above 10 mo SMA, the model was all-in SPY the next month. If it was below, the model was all-in 30 day TBill.
Here are the tell-tale graphics on why Flack's approach works:
The approach catches most of the upside
and avoids most of the downside
Here's a look at lifetime performance, all measured from 10 mo after SPY inception, about 20 years ago:
Significantly higher absolute growth (by more than 200%) and APR (by more than 2%) than either SPY buy-and-hold or a 60/40 SPY/TBill fixed portfolio.
Significantly lower volatility than SPY buy-and-hold. In fact, the downside standard deviation DSDEV is almost half! Making risk adjusted returns twice a buy-and-hold strategy...both Sharpe and Sortino.
Ulcer Index is substantially lower than either SPY or 60/40 portfolios. And, perhaps best of all, the maximum draw down is only -17% versus -51% and -34%, respectively.
And, a look at rolling 3 and 5 year periods:
In 170 rolling 5-year periods, the approach beat the fixed 60/40 returns 100% of the time and never drew a loss. It beat 83% of 194 3-year periods as well...and it never lost more than 1%.
So, unless he is talking about relatively short periods, I do not understand Mr. Hulbert's disappointment, as summarized by MJG:
Hulbert is not happy with the results. Over the entire history of his data set, he finds that the indicator does yeomen work, but it has failed over more recent selected timeframes.
How can anyone be disappointed with performance of this method? Results of the SMA dynamic allocation method are remarkable. It produces healthy returns with much less volatility.
So, hats off to Flack. My belief continues to be that investors owe it to themselves to actively
manage their portfolios against downside risk.
MJG, I can feel you cringing now, but I will keep an open mind and be sensitive to opposing views
Ted thanks again for link that led me to Faber's paper A Quantitative Approach to Tactical Asset Allocation