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 |
|---|---|---|---|---|
| 1981 | 5 | 7 | 0.28% | -1.14% |
| 1982 | 5 | 7 | +4.05% | +0.04% |
| 1983 | 12 | 0 | +1.02% | N/A |
| 1984 | 5 | 7 | +1.16% | +0.40% |
| 1985 | 11 | 1 | +1.17% | +4.25% |
| 1986 | 10 | 2 | +0.95% | +9.32% |
| 1987 | 9 | 3 | -0.59% | +0.93% |
| 1988 | 7 | 5 | +1.32% | +1.22% |
| 1989 | 12 | 0 | +0.92% | N/A |
| 1990 | 3 | 9 | -3.61% | +1.85% |
| 1991 | 11 | 1 | +0.67% | +11.16% |
| 1992 | 12 | 0 | +0.61% | N/A |
| 1993 | 12 | 0 | +0.80% | N/A |
| 1994 | 5 | 7 | -2.43% | +1.47% |
| 1995 | 12 | 0 | +2.56% | N/A |
| 1996 | 11 | 1 | +1.83% | +1.89% |
| 1997 | 12 | 0 | +1.95% | N/A |
| 1998 | 10 | 2 | +1.49% | +7.13% |
| 1999 | 11 | 1 | +0.30% | +6.25% |
| 2000 | 8 | 4 | +0.48% | -1.16% |
| 2001 | 0 | 12 | N/A | -1.42% |
| 2002 | 1 | 11 | -6.14% | -1.77% |
| 2003 | 9 | 3 | +2.38% | +2.41% |
| 2004 | 9 | 3 | +0.23% | +0.86% |
| 2005 | 11 | 1 | +0.48% | +3.00% |
| 2006 | 12 | 0 | +0.99% | N/A |
| 2007 | 10 | 2 | +0.34% | -3.49% |
| 2008 | 0 | 12 | N/A | -4.0% |
| 2009 | 8 | 4 | +2.03% | +3.06% |
| 2010 | 8 | 4 | +1.78% | +1.37% |
| 2011 | 6 | 6 | +0.10% | +0.44% |
| 2012 | 12 | 0 | +1.15% | N/A |
| 2013 | 12 | 0 | +1.50% | N/A |
| 2014 | 12 | 0 | +0.97% | N/A |
| 2015 | 9 | 3 | -0.27% | +0.19% |
| 2016 | 10 | 2 | +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