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Combining SMA10 and Sahm Indicator

Steve LeCompte | | Posted in: Economic Indicators, Technical Trading

Guide Trend Following and Momentum Moving averages

Key Insight

SMA10+Sahm (hold S&P 500 unless below its 10-month SMA when Sahm first signals recession, then cash until it recrosses SMA10) beat S&P 500 buy-and-hold by 1.9% CAGR and SMA10 by 2.3% (monthly; 1960–Jul 2021; 0.1% switch cost; only nine 2-way trades).

A subscriber asked about a stock market timing strategy that combines the market 10-month simple moving average (SMA10) and the Sahm Recession Indicator (Sahm), which signals the start of a recession when the 3-month SMA of the U.S. unemployment rate is at least 0.5% higher than its low during the last 12 months. Specifically, the strategy:

  • Holds the S&P 500 Index (SP500) unless it is below its SMA10 and Sahm first signals a recession.
  • Subsequently holds cash until SP500 crosses above its SMA10.

To investigate, we compare three alternative strategies:

  1. SP500 - buy and hold the index.
  2. SMA10 - hold the index only while it is above its SMA10 and otherwise hold cash.
  3. SMA10+Sahm - combined signals as specified above.

We focus on average monthly return, standard deviation of monthly returns, monthly reward/risk (average return divided by standard deviation), compound annual growth rate (CAGR) and maximum drawdown (MaxDD) as key performance metrics. Using end-of-month levels of SP500 since March 1959, Shiller's monthly SP500 dividends (to estimate SP500 total returns) since January 1960, Sahm since inception in December 1959 (history vintage 8/6/2021) and T-bill yield since December 1959, all through July 2021, we find that:

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