Market Returns - Simple Improvement

To understand why, look at the blue line (the timing portfolio). A level line (with perhaps a short incline or decline) indicates periods where the switch would put you in cash. Eyeballing the above chart suggests the first one was toward the end of 1998 and then only briefly. But look at the major trouble spots for the market (red line) namely the drawdowns of about 50% from late 2000 to mid-2003 and similarly from the beginning of 2008to early 2010. Now, look at the blue line for both periods. Note how it goes level in both periods, avoiding most of these losses.

Had you used this filter, you would have achieved excellent returns without losing a lot of sleep or looking for tall buildings with windows you could jump out of.

A Magic Bullet?

So, have we found a “magic bullet” to protect against bad markets without giving up return? Can life be so simple? The obvious answer is “No,” if only because markets are never easy.

Let’s investigate further by looking at robustness and generality.

Robustness: By “robustness” we refer to the sensitivity of the values used for the SMA. We used 10 months. Do we get similar results for other values? SMAs of eight months and 12 months were checked. Both produced returns in excess of $1.0 million. Drawdowns remained in the 17 – 18% range. The 12-month SMA produced better results than the 10-period SMA, although not meaningful enough to warrant a change. Tests at 6 and 12 months produced profit levels over $900,000 with drawdowns in the 17 – 18% range.

The test appears robust in the sense that it works well for other ranges. (Beware of any test that fails a robustness test. The backtest was likely “fit” to the data to produce the best possible result. Backtesting done this way fails when different data or time periods are used).

Generality: To assess generality, we need to test different time periods and different assets. Several tests are performed below.

Generality Test I — General Electric

General Electric provides one such test. Time-wise, GE is the tale of two companies: early on, it was one of the great corporations in America; more recently a struggling, perhaps failing company. Let’s look at three periods: GE EarlyGE Late, and GE Total and the effects of using an SMA screen:

GE Early (1987 – 2000)

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GE Late (2001 – January 2019) 

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GE Total (1987 – January 2019) 

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Aside: You cannot add the two pieces together to come up with the totals for the full period because each period (Early and Late) is started with $100,000.

Observations

An SMA of 10 months was used and applied to GE (not a market index).

GE Early reflects a growth stock similar to Facebook, Apple, Amazon, and Netflix in recent years. The uptrend was so consistent and strong that any crossovers were short-lived and cost you money. Buy and hold beat the SMA strategy in every category but the drawdown. In essence, being out of the market at any time during this growth was not helpful.

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