### Testing the Guard Score

**January 28, 2016** - Technical Trading

A subscriber suggested testing of the Guardian Indicator, “a proprietary new market-strength indicator designed to enhance risk-adjusted investment returns by identifying long-term directional changes in the stock market.” This indicator tabulates Guard Score (GS) “votes” by U.S. equity sectors to predict the trend of the overall U.S. stock market. Per the paper “Introducing Guardian Indicator: Market Timing Based on Momentum and Volatility”, flagged by the subscriber, GS is the greater of two contributing indicators:

- Price momentum indicator (PI), the ratio of the 50-day simple moving average (SMA) to the 200-day SMA of asset/index level.
- Volatility regime indicator (VI), the ratio of the 1250-day SMA to the 250-day SMA of downside deviation, calculated as the square root of the sum of squared negative daily returns over the past 90 trading days divided by 90.

If GS is greater than one, the trend is bullish. The paper applies GS to time the S&P 500 Index during 1957-2014 (apparently without dividends). Here we replicate the GS series for the S&P 500 Index (excluding dividends) and use it to time the index. In calculating returns, however, we account for S&P 500 dividends by each month allocating the annual dividend yield from Robert Shiller’s data to the days of that month (dividing by 252). We assume cash earns the 3-month U.S. Treasury bill (T-bill) yield. We invest in the S&P 500 Index (T-bills) when prior-day GS for the index is greater than (less than or equal to) one. We focus on compound annual growth rate (CAGR) and maximum drawdown (MaxDD) as performance measures. We use total return from buying and holding the S&P 500 Index (B&H) as a benchmark. Using daily S&P 500 Index level and monthly S&P 500 dividend yield and T-bill yield during January 1950 through December 2015 (allowing first calculation of VI in May 1955), *we find that:* Keep Reading