Saturday afternoon found me at the neighborhood chili cook-off, which I won one year and placed runner-up a second year. Being lazy, I did not enter this year. Anyway, I was talking with a good friend who is in the biz, and he was concerned about the current state of the markets. I was sharing that I was relatively unconcerned, as I believe we are not witnessing more than a run-of-the-mill correction. What seemed to concern him the most was that the S&P 500 had fallen more than 1.5% beneath its 200 day moving average. I did not find this to be particularly disturbing, and offered a guess. My guess was that after falling more than 1.5% beneath its 200 day moving average, the S&P 500 (using $SPY as a proxy) would rise on average between 4 to 5% over the next 50 days. He asked me to test it, and so I have. Here are the results.
The Rules:
- Buy $SPY at the close when it falls more than 1.49% beneath its 200 day moving average
- Sell $SPY at the close X days later
- No commissions or slippage was accounted for
- All $SPY history was used
The Results:
So Bryan was right, and my prediction was way, way off. $SPY closing more than 1.49% beneath its 200 day moving average has been a fairly neutral to bearish setup, over the past 18 years.
- There were 637 instances of the setup.
- There were 37 trades held the full 50 days.
- The median of the 37 trades was 1.21%.
- The biggest winner was closed in June, 2003 at 13.05%
- The biggest loser was closed in November, 2008 at -32.89%
I am still surprised at how neutral to bearish this setup has been. Of course the -32.89% loser skews the average, but when the first close beneath the 200 day moving average yields a strong average trade of better than 4%, it is interesting that changing the variable to 1.49% beneath the moving average affects future results so dramatically.
For you folks that can’t get enough of the numbers, below is a graph of all the trades.
Have a great holiday trading week!
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