As of the 2.8.12 close, the ROC5 indicator signaled a short entry on SPY.
Since 12.08.11, the indicator has opened and closed 5 trades. Of those 5 trades, 1 closed flat, 3 were closed for losses, and the most recent long trade was closed for a profit. In short, the whipsawing has not been easy for the indicator. You may or may not remember that the indicator was developed as a long term trend indicator, but over the past 4 months or so, it has not been able to discern a strong trend.
The chart below shows the recent trades. Red down arrows are short entries. Green up arrows show the long entries.
Historically, it is rare for the indicator to be whipsawed for an extended period of time. It has been very interesting to watch in real time, although I’m beginning to believe that it will not be a very good short-term indicator. Only (real)time will tell.Comments »
Chess has written many times about the 20 month moving average, and I have been meaning to backtest it for him for quite some time. Here are the results.
- Buy $SPX at the close of the last day of the month if the monthly close is above the 2o month moving average.
- Sell $SPX at the close of the last day of the month if the monthly close is below the 20 month moving average.
The first trade is made on 6.30.1960. No commissions or slippage are included.
- Compound Annual Return = 6.08%
- Exposure = 71.52%
- Risk Adjusted Return = 8.50%
- Average Profit/Loss = 17.93%
- 23 Trades
- Winners = 65.22%
- Max System % Drawdown = -33.21%
Buy and Hold of $SPX over Same Time Period
- Compound Annual Return = 6.31%
- Max System % Drawdown = -56.77%
Equity Curve for 20 Month Moving Average System
All charts can be enlarged by clicking on them…
Using the 20 month moving average (over the time period above) to time the S&P slightly underperformed buy and hold. However, the maximum percentage drawdown was nearly cut in half. Thus, this method might serve as a good gut check for the long-term investor, allowing him to capture similar returns as buy and hold while lowering the likelihood of a devastating drawdown.
If I use all $SPX data which starts the first trade at 9.30.29, the compound annual return drops to 4.97% and the max drawdown grows to -61.03%. The late 1930s and early 1940s were tough on this strategy as the S&P executed a slow up and down bleed which whipsawed the system.
Chart Showing the 20 Month Moving Average
The blue line is the 20 month moving average.Comments »
Sorry, no time for charts this morning!
This scan uses all major exchange listed stocks. It does not incorporate a volume or price filter.
Let’s take a longer view, below.
Note that the percentage of stocks above the 20 day moving average turns southward before the longer averages, as we would expect.
Click on the charts to enlarge them.Comments »
My recent posts on the Fidelity Sector Fund Rotational Strategy generated many comments. The following strategy was suggested by the commenter named Redshark.
The problem with these rotational strategies is that unless someone is giving out the signals or the investor has the ability to set up the strategy in Excel, there is no easy way for the investor to trade the rotational system. There are simply too many variables to calculate by hand, and most investors do not have the time or inclination to learn R or learn how to code in Tradestation or the like.
What I like about Redshark’s idea is that as the title states, it is very easy to calculate the signals. In fact, all one needs is the most basic of charting packages.
I have tested it over the Fidelity Sector Funds, which I particularly like because they can be traded with no slippage and zero commissions. This makes them the perfect candidate for testing over as historical results are more likely to be able to be generalized into the future.
All that being said, here are the rules:
- Buy the 3 funds that have been above their 50 day moving averages for the most days
- Hold the funds for at least 30 days
- On the 30th day, if the $SPX is beneath its 50 day moving average, all funds will be liquidated the next day and the system will not trade again until the $SPX is above its 50 day moving average.
- On the 30th day, if the open positions are still in the top 3, do nothing and re-evaluate the next day OR if a fund(s) is not still ranked in the top 3, sell it on the 31st day and buy the fund that has replaced it in the top 3.
That is all there is to it. I have not at all optimized the variables. I chose 50 days for both because I simply prefer the 50 day moving average.
Results from 1.1.2000 to 2.2.2012
- Compound Annual Return: 12.21%
- Winners: 60.78%
- Maximum System Drawdown: -32.10%
- Sharpe: 0.74
Historical Profit Table:
I expect that most readers will wonder what this will do with ETFs. I’m wondering too.
Redshark suggested using bonds. I did add two Fidelity bonds (FBNDX and FTBFX) to the portfolio, and they had a deleterious effect on performance.
So there you have it: A very simple rotational system that beats buy-and-hold with reduced drawdowns, and you don’t need any specialized software to generate the signals.Comments »