Pervasiveness and Robustness of SMA Effectiveness for Stocks

Posted in Technical Trading

 

Do trading rules based on price relative to intermediate-term and long-term simple moving averages (SMA) outperform a buy-and-hold approach for all kinds of stocks and stock portfolios? In the January 2013 update of his paper entitled “Market Timing with Moving Averages”, Paskalis Glabadanidis examines SMA performance based on monthly returns. He uses an SMA measurement interval of 24 months for most analyses, but includes robustness tests for intervals of 6, 12, 36, 48 and 60 months. He enters (exits) a stock portfolio or individual stock whenever its monthly closing level is above (below) its SMA. When not in stocks, funds earn the contemporaneous 30-day U.S. Treasury bill yield. He applies a trading friction of 0.5% of portfolio value when entering and exiting positions. He focuses on portfolios of U.S. stocks sorted/ranked monthly by nine stock/firm characteristics: market value (size); book-to-market ratio; cash flow-to-price ratio, earnings-to-price ratio, dividend-price ratio, short-term reversal, medium-term momentum, long-term price reversal and industry classification. As robustness tests, he considers individual U.S. stocks and market and characteristic-sorted portfolios of stocks from seven non-U.S. developed countries (Australia, Canada, France, Germany, Italy, Japan and UK). Using monthly returns for value-weighted portfolios sorted by the above characteristics (from the Ken French Data Library) and for 18,397 individual U.S. stocks during 1960 through 2011, and monthly portfolio returns for the seven country markets mostly during 1975 through 2010, he finds that: (more…)

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