Bollinger Bands: Buy Low and Sell High?

Are Bollinger Bands (BB) useful for deciding when to buy low and when to sell high the overall U.S. stock market? In other words, can an investor beat a buy-and-hold strategy by systematically buying (selling) when the market crosses below (above) the lower (upper) BB? To check, we examine the historical behavior of BBs around the 21-trading day (one month) simple moving average (SMA) of S&P 500 SPDR (SPY) as a tradable proxy for the U.S. stock market, with 3-month Treasury bill (T-bill) yield as the return on cash when not in SPY. We consider BB settings ranging from 0.5 to 2.5 standard deviations of daily returns, calculated over the same trailing 21 trading days. We focus on net compound annual growth rate (CAGR), maximum drawdown (MaxDD) and annual Sharpe ratio (with average daily T-bill yield during a year as the risk-free rate for that year) as key performance metrics. Baseline SPY-cash switching frictions are 0.2%. Using daily unadjusted closes of of SPY (to calculate BBs), dividend-adjusted closes of SPY (to calculate total returns) and contemporaneous T-bill yield from the end of January 1993 (SPY inception) through late November 2019, we find that: (more…)