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Simple Tests of an Asymmetric SMA Strategy

October 29, 2020 • Posted in Technical Trading

A reader asked: “Should the moving average crossover threshold be symmetrical, or does it make sense to try getting back in close to the bottom?” In other words, should we use a 10-month simple moving average (SMA10) for the typical long bull stock market and then switch to a 3-month average (SMA3) after crossing under SMA10 so that we re-enter stocks close to a V-shaped bear market bottom? To investigate, we use SPDR S&P 500 ETF Trust (SPY) as a proxy for the U.S. stock market and compare performance statistics for four strategies:

  1. SPY – buying and holding SPY.
  2. SMA10 – holding SPY (cash) when SPY is above (below) its prior-month SMA10.
  3. SMA3 – holding SPY (cash) when SPY is above (below) its prior month SMA3.
  4. SMA10-SMA3 – when SPY is above its prior-month SMA10, hold SPY, and when SPY is below its prior-month SMA10, hold SPY (cash) when SPY is above (below) its prior-month SMA3.

We use average daily 3-month U.S. Treasury bill (T-bill) yield as the return on cash. We assume constant 0.1% switching frictions when moving between SPY and cash. Using monthly dividend-adjusted closing prices for SPY and T-bill yield during January 1993 through September 2020, we find that:

(more…)

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