November 25, 2013

Percent S&P500 Stocks Trading Above MA50 as Market Timing Indicator

Does the percent of S&P500 stocks trading above their 50 day moving average predict future market returns? Over the last several weeks, I have seen several charts of the percent of S&P500 stocks trading above their 50 (or 200) day moving average overlaid on the S&P500. From these charts, it appears one could build a market timing indicator. The concept really looks like it has promise.

SP500-MA50Perc1

Chart from April to November 2013.

The Tests

Dates: 1/1/2001 to 10/31/2013.

PercentAbove50 = 100*((# of S&P 500 stocks trading above their 50 day SMA)/500)

Above Indicator Test

Both the Buy and Sell Rules use the same cut off value.

Buy Rules

  • On the last day of the trading week
  • PercentAbove50 > (10,20,30,40,50,60,70,80,90)
  • Buy SPX at the close

Sell Rules

  • On the last day of the trading week
  • PercentAbove50 < (10,20,30,40,50,60,70,80,90)
  • Sell SPX at the close

Below Indicator Test

Both the Buy and Sell Rules use the same cut off value.

Buy Rules

  • On the last day of the trading week
  • PercentAbove50 < (10,20,30,40,50,60,70,80,90)
  • Buy SPX at the close

Sell Rules

  • On the last day of the trading week
  • PercentAbove50 > (10,20,30,40,50,60,70,80,90)
  • Sell SPX at the close

Baseline Test

This is a simple market timing rule that produces good results.

Buy Rules

  • On the last day of the trading week
  • SP-500 Close > 200 day moving average
  • Buy SPX at the close

Sell Rules

  • On the last day of the trading week
  • SP-500 Close < 200 day moving average
  • Sell SPX at the close

 

The Results

SP500-MA50Perc2

Using the MA200 market timing greatly reduces the maximum drawdown while increasing the Compounded Annual Return. Mostly it does not look like this indicator can be a market timing tool. ‘Above 90’ seems to indicate the market is ready for a down turn.

Besides the above tests, I applied moving averages to PercentAbove50 and moving average crossovers with similar to worse results. Send me any ideas you want tested on this indicator.

Again, this reminds us what looks good in a chart may not test out. That is why I do these tests and share results even if they that don’t work out.

Spreadsheet

If you’re interested in a spreadsheet of my testing results, enter your information below, and I will send you a link to the spreadsheet. Included is a year by year breakdown of the returns. The raw data of the number of S&P500 stocks trading above their MA50 is also in the spreadsheet.

 

Click Here to Leave a Comment Below

Ronen - November 25, 2013 Reply

The numbers clearly indicate that this pattern follows mean reversion. Would it be possible to post equity curves of some of the variations to how well it worked over the 10 year period? If mean reversion is hibernating, I would expect to see the equity curves pulling back recently.

Also, it would be nice to see this timing model working in conjunction with buying the top “X” ranking S&P500 stocks and see how it performed. Maybe try highest HV vs lowest HV. Considering this is a longer term hold, lower HV I would assume works better.

    Cesar Alvarez - November 26, 2013 Reply

    Ronen,

    Tell me 2-4 runs from the spreadsheet that you want to see equity curves for, and I will post them up.

    Cesar

Ronen - November 26, 2013 Reply

How about below ratio 20, 40, 80, and then buy and hold for a bench mark comparison.

Thanks!

Stop Losses and Equity Curves » Alvarez Quant Trading - April 24, 2014 Reply

[…] This extended research is from two readers’ requests. Request one is adding stop losses on the “Monthly S&P500 Stock Rotation Strategy.” Request two is seeing the equity curves from “Percent S&P500 Stocks Trading Above MA50 as Market Timing Indicator.” […]

Marco - September 24, 2014 Reply

What about trying to use this indicator for stock trading with ConnorsRSI?
I think this would have a relevant impact on the results.
http://nightlypatterns.wordpress.com

    Cesar Alvarez - September 24, 2014 Reply

    That is a good potential future blog post. I have not done any posts with CRSI. Maybe this will be my excuse to do one.

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