Combining SMA10 and P/E10 Signals

In response to the U.S. stock market timing backtest in "Usefulness of P/E10 as Stock Market Return Predictor", a subscriber suggested combining a 10-month simple moving average (SMA10) technical signal with a P/E10 (or Cyclically Adjusted Price-Earnings ratio, CAPE) fundamental signal. Specifically, we test:

• SMA10 - bullish/in stocks (bearish/in cash) when prior-month stock index level is above (below) its SMA10.
• SMA10 AND Binary 20-year - in stocks only when both SMA10 and P/E10 Binary 20-year signals are bullish, and otherwise in cash. The latter rule is bullish when last-month P/E10 is below its rolling 20-year monthly average.
• SMA10 OR Binary 20-year - in stocks when one or both of the two signals are bullish, and otherwise in cash.
• NEITHER SMA10 NOR Binary 20-year - in stocks only when neither signal is bullish, and otherwise in cash.

We use Robert Shiller's S&P Composite Index to represent stocks. We consider buying and holding the S&P Composite Index and the standalone P/E10 Binary 20-year strategy as benchmarks. Using monthly data from Robert Shiller, including S&P Composite Index level, associated dividends, 10-year government bond yields and values of P/E10 as available during January 1871 through September 2022, we find that: