“Best” Indicator Consistency Across Samples

A subscriber inquired whether “The Only Indicator You Will Ever Need” really works. This technical indicator, a form of the Coppock Guide (or curve or indicator), applied to the Dow Jones Industrial Average by Jay Kaeppel, is a multi-parameter composite based on monthly closes as follows:

1. Calculate the asset’s return over the past 11 months.
2. Calculate the asset’s return over the past 14 months.
3. Average these two past returns.
4. Each month, calculate the 10-month front-weighted moving average (WMA) of this average (multiply the most recent value by 10, the next most recent by 9, the value for the month before that by 8, etc). Then sum the products and divide by 55.
5. Hold the asset (cash) if this WMA is above (below) its value three months ago.

We designate this indicator 11-14WMA3. To test 11-14WMA3 in realistic scenarios, we apply it to the entire available histories for three exchange-traded funds (ETF): SPDR S&P 500 (SPY), SPDR Dow Jones Industrial Average (DIA) and iShares Russell 2000 (IWM). We consider buy-and-hold and a conventional 10-month simple moving average timing strategy (SMA10) as benchmarks. SMA10 holds the ETF (cash) when the ETF’s most recent monthly close is above (below) its 10-month SMA. Using monthly dividend-adjusted and unadjusted closes for the ETFs from their respective inceptions through September 2019 and contemporaneous 3-month U.S. Treasury bill (T-bill) yield, we find that: (more…)