In an earlier article, Beyond the Ultimate Death Cross, I showed how an investment strategy for the stock market based on signals from a simple moving-average crossover system – the MAC-system – can produce significantly better returns than buy-and-hold. This system’s returns can be further improved by linking it to my bond market model.
My improved MAC-system works as follows, with a buy signal and a sell signal triggering shifts from investment in the stock market to the bond market, and vice versa.
Buy signal for the S&P 500
A buy signal occurs when the 34-day exponential moving average (EMA) of the S&P 500 becomes greater than 1.001 times the 200-day EMA.
Sell signal for the S&P 500
A sell signal occurs when the 40-day simple moving average (MA) of the S&P 500 crosses below the 200-day MA.
When a buy signal occurs, the whole investment goes into an S&P 500 index fund, and when a sell signal occurs all the funds are moved from the S&P 500 index fund to a high beta Treasury bond fund or a low beta GNMA fund as indicated by the Bond Value Ratio (BVR) from my bond market model.
To simulate this strategy over longer periods, I began with $1.00 in a bond fund selected according to the BVR-signals (or a money market account, prior to 1980 when bond funds were not available) on the first day of every year from 1966 to 2010. I then transferred the money to a S&P 500 index fund when the first buy signal from the MAC-system occurred, and continued switching investments according to the MAC-signals. I then calculated the terminal value for each year’s $1.00 investment, in all cases through August 31, 2012.
Starting with a dollar during each of the 45 years from 1966 to 2010, one would have invested a total of $45 cumulatively by the end. Summing the 45 terminal values, this strategy would have netted this dollar-per-year investor a sum of $3,905. Following a buy-and-hold (B&H) strategy in the S&P 500, one would have only $868, less than a fourth as much.
Had one made the first investment in January 1990, instead of 1966, one would have invested a total of $21 by now. The sum of the 21 terminal values to August 31, 2012 was $161, versus $55 for the B&H strategy in the S&P 500.
The table below lists the internal rate of return (IRR) for the $1 annual investments obtained from a money market account, the B&H strategy of the S&P 500, and from the improved MAC system. Trading costs were taken into account by applying a slippage rate of 0.25% per investment switch.
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