9 Month Moving Average, S&P500 1980-2016

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:

YearNumber Months Above 9M MANumber Months Below 9M MAAvg Monthly Return When Above 9M MAAvg Monthly Return When Below 9M MA
1981570.28%-1.14%
198257+4.05%+0.04%
1983120+1.02%N/A
198457+1.16%+0.40%
1985111+1.17%+4.25%
1986102+0.95%+9.32%
198793-0.59%+0.93%
198875+1.32%+1.22%
1989120+0.92%N/A
199039-3.61%+1.85%
1991111+0.67%+11.16%
1992120+0.61%N/A
1993120+0.80%N/A
199457-2.43%+1.47%
1995120+2.56%N/A
1996111+1.83%+1.89%
1997120+1.95%N/A
1998102+1.49%+7.13%
1999111+0.30%+6.25%
200084+0.48%-1.16%
2001012N/A-1.42%
2002111-6.14%-1.77%
200393+2.38%+2.41%
200493+0.23%+0.86%
2005111+0.48%+3.00%
2006120+0.99%N/A
2007102+0.34%-3.49%
2008012N/A-4.0%
200984+2.03%+3.06%
201084+1.78%+1.37%
201166+0.10%+0.44%
2012120+1.15%N/A
2013120+1.50%N/A
2014120+0.97%N/A
201593-0.27%+0.19%
2016102+1.03%+3.09%

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