Sunday, May 10, 2009 EST
This post is in response to a forum entry regarding timing the stock market using a 200 day simple moving average. 

I read the paper. This 47 page document can be summed up as follows:

When the S&P 500 closes above the 200 day simple moving average (SMA) BUY. When the S&P 500 closes below the 200 SMA sell. The author mentions that another trader uses this signal but adds one more parameter: The close should close 1% above the 200 day SMA, or 1% below the 200 SMA before taking action.

I ran a back test using AMIBroker and the results are not all that impressive.

First a chart of the S&P 500 with the SMA plotted. Overall it seems like a 200 day SMA can be used well to time the market.

Now lets take a look at the same chart in AMIBroker with BUY and SELL signals applied. It is clear around market tops and bottoms this system creates many false trades.

 

All back tested results are from January 1998 to December 2007

The results: BUY when the index closes 1% above the 200 day SMA. Sell and sell short when the index closes down 1% lower than the 200 day SMA.  127% return about 8.3% per year.

Back test but remove the 1% parameter.

Results: BUY when the index closes above the 200 day SMA and sell and sell SHORT when the index closes below the 200 day SMA. This back tested results removes the 1% parameter and performed much better returning 209% about 11.5% per year, BUT at more than double the trades.

Summary: Watching the 200 day SMA can be helpful and may beat buy and hold but it no where compares to the MTR-TM.

 
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