Simple Tests of an Asymmetric SMA Strategy

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 (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. We also perform a sensitivity test to see whether SMAs of other lengths work better. Using monthly dividend-adjusted closing prices for SPY and T-bill yield during January 1993 through December 2021, we find that: