### Challenging SMA Effectiveness for Stocks

**March 30, 2016** - Technical Trading

“Pervasiveness and Robustness of SMA Effectiveness for Stocks” summarizes research finding that applying a simple moving average (SMA) trading strategy to U.S. stock portfolios produces strong risk-adjusted performance. This strategy is in stocks (cash) when price is above (below) its SMA. Is this finding valid? In his March 2016 paper entitled “Revisiting the Profitability of Market Timing with Moving Averages”, Valeriy Zakamulin challenges the validity of the research. First, he replicates the finding via simulations that incorporate one-month look-ahead bias (by including the last month of SMA calculation intervals as a strategy return). He then corrects strategy return calculations to eliminate this bias. As in the original research, he bases simulations on the following:

- Test data are monthly value-weighted returns of three sets of 10 portfolios from the data library of Kenneth French, each set formed by sorting on market capitalization, book-to-market ratio or momentum.
- Return on cash is the one-month U.S. Treasury bill yield.
- One-way stocks-cash switching cost is 0.5%.
- The sample period is January 1960 through December 2011.

Key performance metrics are net Sharpe ratio and four-factor alpha (adjusting for market, size, book-to-market and momentum factors). Using the specified data and assumptions, *he finds that:* Keep Reading