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A Simple And Timeless Way To Trade The S&P 500 Successfully, Part 2

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Via SeekingAlpha.com

A Simple And Timeless Way To Trade The S&P 500 Successfully was first published by Seeking Alpha seven years ago.

It proposes a simple strategy: buy the SPX 500 when it breaks above its 300-day SMA average (the red line in the linked chart), and sell when it goes below it. For our purposes here, I am substituting the 200-day SMA because it is higher-performing when compared to the 300-day SMA.

The original article generated a significant response and a good degree of controversy too (which surprised me), but it was all constructive criticism. I have added 7 years of data to the original spreadsheet, and ran the 200-day and 300-day moving-average crossovers again, using Excel functions for the calculations.

The Data

  • 7,116 trading days are included in this study. It runs from January 2, 1992, to April 1, 2020.
  • The raw information is available here: Excel:1. SPX Data 1992-2020 w/chart.
  • There were 180 trades (in and out) with the 200-day SMA. See link: Excel: 2.~ 200-300 day return 1992-2020.
  • There were 128 trades (in and out) with the 300-day SMA. See same link: Excel: 2.~ 200-300 day return 1992-2020.
  • The last sell date was March 5, 2020.

50-Day M/A

  • The 50-day SMA is also recorded alongside the 200- and 300-day databases, but no trades are listed for it.
  • However, the 50-day moving average could be used to augment the results of the 200-day strategy by providing a leading indicator at the tail end of a bear market, just as a new bull market is emerging (it leads the 200-day SMA by approximately 20 days).
  • You would buy when the upward trend of the SPX 500 crosses the 50-day SMA, and look for final confirmation at the 200-day SMA. The 50-day cross-over is clearly visible on a chart (for example, see March through July 2009).
  • And a golden crossover occurs when the 50-day SMA crosses above the 200-day SMA.
  • I do not think the 50-day SMA is useful as a leading indicator for bear markets. In a bear market, the trend moves so rapidly and dramatically downward through the 50-day and 200-day SMA that everything occurs in an extremely short time period. The crash of March 2020 is a good example of this.
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Results

  • The 200-day SMA for the SPX 500 has a slightly-better CAGR (compound annual growth rate) over the 28-year period (9.48%) than the 300-day SMA (8.64% CAGR).
  • The CAGR for the SPX 500 for the same time period was 6.94%.
  • The superior results of the 200-day MA in the tables below can be gained only if an investor buys or sells the index when it crosses above or below the moving average, and not at the end of that day.
  • This is an important point. If the buy/sell had been at the adjusted close of the day, you would have had a lesser gain (7.22% CAGR). The cumulative difference in these results is significant over time.
  • With present-day algorithmic trading systems, it is possible to create these criteria in a computer-assisted trade. Individual investor platforms (e.g., TD Ameritrade (NASDAQ:AMTD)) will also send you a trading text alert of the moving average crossover.
  • This strategy accumulates SPX points when it is in the market. No points are added when it’s in cash. There was no trading during the two bear markets between 1992-2020 (4 years).
  • Pts. at Index close in the table (below) means the SPX 500 was hypothetically bought/sold at the adjusted close of that day.
  • Pts. at 200-day MA means the SPX 500 was bought/sold precisely when the index crossed the moving average intraday.

1992-2020 Pts. at Index Close Pts. At 200- Day MA

All years Pts. Gained 2313.96 4352.64
CAGR 7.22% 9.48%
Total Return 558.00% 1054.00%
SPX 500 (1992-2020)
Pts. Gained 2126.00
CAGR 6.94%
Total Return 512.00%

1992-2000
Pts. Gained 970.11 1172.48
CAGR 18.79% 21.18%
10 Yr Return 234.00% 283.00%
SPX 500 (1992 – 2000)
Pts. Gained 951.00
CAGR 6.94%
10 Yr Return 18.55%
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2000-2010
Pts. Gained 508.90 1134.17
CAGR 3.22% 7.33%
10 Yr Return 48.00% 103.00%
SPX 500 (2000-2010)
Pts. Gained -294.00
CAGR -2.39%
10 Yr Return -22.00%

2010-2020
Pts. Gained 834.95 2045.98
CAGR 5.88% 11.07%
10 Yr Return 75% 150.00%
SPX 500 (2010 – 3/27 2020)
Pts. Gained 1952.00
CAGR 9.02%
10 Yr Return 137.00%

Observations

  • Buy-and-hold matches the performance of the 200-day moving average in the steady uptrend of a bull market (like 2010-20). However, it does very poorly in a sideways market, and catastrophically in a bear market. It would take an investor years to make up the losses.
  • Corrections/sells in the strategy lasted a minimum of 8 weeks to a few months. During the last decade (2010-2020), there were four market corrections with lengths of: 101 trading days, 76 days, 52 days, and 44 days.
  • Bear markets grind on for years. The Great Bear of 2008-09 was 391 trading days; the 2001-03 bear market was 637 trading days!
  • That being said, the primary trend of the market is enduringly bullish, and will rise for years without touching its 200-day SMA on the downside.
  • The best decades for performance were the 1990s followed by 2010-2020. The millennial decade (2000-10) was an exceedingly difficult 10 years for investors. It was bookmarked by 2 bear markets that lasted a total of 4 years (637 + 391 days/256). Depending on your start date, the 2000s were a time of double-digit negative returns for the SPX 500.

Conclusions

  • The new data includes the last 7 years. As in 2013 and in 2009, it remains true that an investor would not have experienced a yearly loss if they had adhered to the 200-day moving average strategy during 1992-2020.
  • For all the slippage (in and out movements) and difficulty of trading alongside the 200-day SMA (and the 300 SMA), these two moving averages offer superb risk management.
  • If combined with the 50-day SMA at the beginning of a sustained upward move, the results could be further enhanced.
  • In a bear market, the index will break below the 200-day line dramatically and continue to drop precipitously in the weeks ahead. In the 2000, 2008, and 2020 market drops, this trend change occurred in a single day.
  • Avoiding the catastrophic losses of a bear market is extremely important, because the money you save will be available for the next trading signal.
  • It is said that 80% of money-managers perform in line with the SPX 500, and about 10% underperform. This strategy places an investor in that enviable position of beating the SPX 500 in difficult markets, and tying it in good ones.
  • Lastly, in retrospect, for long-term investors reading here, this strategy sold on March 5, 2020, hundreds of SPX points above where we are now. It will remain in cash on the sidelines until a new moving average crossover occurs.
  • If you decide to utilize this strategy (or parts thereof), you are essentially substituting mathematics for what you may or may not know about stock market direction. As Mark Twain, the humorist, once said , “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
  • Two hundred (200) days of a moving average is a large body of decision-making created by an army of professional traders. They are looking for the same answer as you: “What’s it worth?” Hopefully, this strategy will offer answers in that regard and keep you safe too.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.




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