Require a Subsequent Confirming Signal?

A subscriber asked about a tactic that requires a subsequent confirming signal before triggering a strategy action. To investigate we use the 10-month simple moving average (SMA10) as applied to the S&P 500 Index and exploited via SPDR S&P 500 (SPY) over the available history of SPY. Specifically, we compare performances of the following three strategies:

1. SPY:SMA10 Baseline – buy (sell) SPY when the S&P 500 Index crosses above (below) its SMA10.
2. SPY:SMA10 Confirmed – buy (sell) SPY when the S&P 500 Index crosses above (below) its SMA10 and holds the crossing action the next month (suppressing whipsaws).
3. SPY:SMA10 Tranched – each month allocated half of funds to SPY:SMA10 Baseline and the other half to SPY:SMA10 Confirmed.

We assume that trades execute immediately at monthly closes coincident with signals (requiring slight anticipation of signals). We assume that cash earns the yield on 3-month U.S. Treasury bills and trading frictions for switching between SPY and cash are 0.1%. We focus on average return, standard deviation of returns, return/risk (average return divided by standard deviation of returns), compound annual growth rate (CAGR) and maximum drawdown (MaxDD), all based on monthly data. Using monthly S&P 500 Index closes since March 1992 and monthly dividend-adjusted closes for SPY since January 1993, both through August 2022, we find that: (more…)