Columns D and F shows the positions signaled by the month-end close for the two SMA strategies. Our source for the monthly closes (Column B) is Yahoo! Finance. Note: For anyone who would like to see the 10- and 12-month simple moving averages in the S&P 500 and the equity-versus-cash positions since 1950, email us for an Excel file (xlsx format) of the data. You want the gains for yourself, not your broker or your Uncle Sam. The strategy is most effective in a tax-advantaged account with a low-cost brokerage service. The S&P 500 numbers in our illustrations exclude dividends. Even if you're investing in a fund that tracks the S&P 500 (e.g., Vanguard's VFINX or the SPY ETF) the moving average signals for the funds will occasionally differ from the underlying index because of dividend reinvestment. However, followers of a moving average strategy should make buy/sell decisions on the signals for each specific investment, not a broad index. ![]() We use the S&P because of the extensive historical data that's readily available. Our illustrations from the S&P 500 are just that - illustrations. The imitation of success gradually turns the previous buying momentum into selling momentum. When the trend reverses, successful investors sell early. ![]() Sometimes the cause is more dramatic - an asset bubble, a major war, a pandemic, or an unexpected financial shock. It may be merely the normal expansions and contractions of the business cycle. When they hear of others making money in the market, they buy in. Timing works because of a basic human trait. Since 1995 it has produced fewer whipsaws than the equivalent simple moving average, although it was a month slower to signal a sell after these two market tops.Ī look back at the 10- and 12-month moving averages in the Dow during the Crash of 1929 and Great Depression shows the effectiveness of these strategies during those dangerous times. This version mathematically increases the weighting of newer data in the 10-month sequence. The 10-month exponential moving average (EMA) is a slight variant on the simple moving average. Nevertheless, a chart of the S&P 500 monthly closes since 1995 shows that a 10- or 12-month simple moving average (SMA) strategy would have ensured participation in most of the upside price movement while dramatically reducing losses. Also, it can produce the occasional whipsaw (short-term buy or sell signal), which we've seen most recently in 2020. The disadvantage is that it never gets you out at the top or back in at the bottom. When the index closes below, you move to cash. In essence, when the monthly close of the index is above the moving average value, you hold the index. Here are the two tools we most frequently use:īuying and selling based on a moving average of monthly closes can be an effective strategy for managing the risk of severe loss from major bear markets. ![]() Anyone who is interested in market timing with ETFs should have a look at this website. But now we use the backtesting tools available on the website. Over the past few years, we've used Excel to track the performance of various moving-average timing strategies.
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