SMA10 vs. OFR FSI for Stock Market Timing

In response to “OFR FSI as Stock Market Return Predictor”, a subscriber suggested overlaying a 10-month simple moving average (SMA10) technical indicator on the Office of Financial Research Financial Stress Index (OFR FSI) fundamental indicator for timing SPDR S&P 500 (SPY). The intent of the suggested overlay is to expand risk-on opportunities safely. To test the overlay, we add four strategies (4 through 7) to the prior three, each evaluated since January 2000 and since January 2009:

1. SPY – buy and hold SPY.
2. OFR FSI-Cash – hold SPY (cash as proxied by 3-month U.S. Treasury bills) when OFR FSI at the end of the prior month is negative or zero (positive).
3. OFR-FSI-VFITX – hold SPY (Vanguard Intermediate-Term Treasury Fund Investor Shares, VFITX, as a more aggressive risk-off asset than cash) when OFR FSI at the end of the prior month is negative or zero (positive).
4. SMA10-Cash – hold SPY (cash) when the S&P 500 Index is above (at or below) its SMA10 at the end of the prior month.
5. SMA10-VFITX – hold SPY (VFITX) when the S&P 500 Index is above (at or below) its SMA10 at the end of the prior month.
6. OFR-FSI-SMA10-Cash – hold SPY (cash) when either signal 2 or signal 4 specifies SPY. Otherwise, hold cash.
7. OFR-FSI-SMA10-VFITX – hold SPY (cash) when either signal 3 or signal 5 specifies SPY. Otherwise, hold VFITX.

Using end-of-month values of OFR FSI, SPY total return and level of the S&P 500 Index during January 2000 (OFR FSI inception) through June 2019, we find that:

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