This article covers a variant on timing the market. In this variant, all funds are either held in cash, or in an S&P500 index fund, depending on the 9 month moving average of the S&P500. Specifically, if the current price is above the 9 month moving average funds are held in the S&P500 index fund, and if the current price is below the 9 month moving average funds are held in cash.
Usually I see this as a 200 day moving average rather than a 9 month moving average. The main difference is that in this analysis the decision to put funds in either an S&P500 index fund or cash is only made on the first day of each month. I think that’s more realistic than making the decision on a daily basis, especially if the amount of funds is substantial.
Over this 36 year study period, the average monthly change when the S&P500 index started the month above its 9 month moving average was +0.96%. Over the same period, the average monthly change when the S&P500 index started the month below its 9 month moving average was +0.26%.
So it seems that, on average, the market has better monthly returns when it’s above its 9 month moving average than when it’s below its 9 month moving average. However, the average return when the market is below its 9 month moving average is still positive, and not by a negligible amount. It isn’t clear that skipping these months is the best long-term strategy.
Let’s look at the annual results of this strategy next. Averages are useful, but omit a lot of valuable information:
|Year||Number Months Above 9M MA||Number Months Below 9M MA||Avg Monthly Return When Above 9M MA||Avg Monthly Return When Below 9M MA|
There are years where this strategy clearly does well, 1981 and 2001 are good examples. But again, there are examples where this strategy would leave your investments in a bad place. E.g., look at 1986, 1990, and 1991.
This strategy has merit, but it doesn’t seem to be a clear win.
This is an analysis of past performance, but past performance is not a guarantee of future performance.
Comments / Questions: joseph AT StockMarketMovement.com