200 day sma trend

[mtvk]

Hi,

Following 200 day sma to stay long or in cash, seems easy.
But looking at the chart it seems there are some consecutive days
in which price has oscillated above and below this line. This would
make losses and too many trading.

Is there a way to avoid whipsaw?

I have seen a strategy of equally invested in us stock,
ex-us world stock, total bond market, reit and commodity.
One would be long in an asset class as long as its current close
price is above 200 day sma.

[rffrydr]

http://siliconinvestor.advfn.com/readmsg.aspx?msgid=25713868
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

These guys don't quite get it...but make an interesting case anyway:

Moving average

Published: June 28 2009 19:05 | Last updated: June 29 2009 09:47

Like a new swear word sweeping across school playgrounds, suddenly everyone is talking about 200-day moving averages. The S&P 500 index is flirting with this crucial level, point out the pundits, having broken through it at the end of May for the first time in a year. That is a bullish signal, apparently. If the market drops below its 200-day moving average again, however, many reckon that is not so good.

Should investors beyond the inane chatter of the day-trading blogosphere care? Looking at moving averages is certainly a useful tool for smoothing out volatility and observing longer-term trends. That the 200-day moving averages for Russian and Brazilian equities are still falling in spite of their extraordinary bounce this year, for example, is a sobering reminder that this is still a bear market.

But history is one thing; having predictive power is quite another. From 1886 to 2007, buying and holding US stocks when the Dow Jones Industrial Average was above its 200-day moving average and selling them when the market fell below this level would have returned an annualised 8.6 per cent after costs, compared with 9.7 per cent for a buy and hold strategy, according to Jeremy Siegel, author of Stocks for the Long Run. That said, such a trading strategy would have avoided the 1929 meltdown while nicely capturing the subsequent upturn. Those watching 200-day moving averages would have also dodged the 1987 crash, although the practice has been pretty much useless since, completely messing up during the dotcom period.

Worse, buying US stocks because the S&P 500 was above its 200-day moving average would have seen money piling in right up to the market’s peak in September 2007. And again the following March. Ouch. Investors should remember that all trading techniques sometimes work and sometimes they do not. Far better to at least overlay whichever hokery-pokery takes your fancy with some genuine valuation analysis.
_________________
Today is the Tomorrow you worried about Yesterday!

[goldbug]

maybe you need to back test. while staying out when it crosses below may be a safe bet, buying when crosses above may not be good enough. or, during pullbacks, you may use 200 day as the support level to get in. my two cents.

[nodoodahs]

I like Geoff's work.

One thing about stocks is that, in a panic, correlations move to 1.00. Panics don't happen often, but they do happen. Lots of stocks that are usually in non-correlated sectors moved together yesterday. An argument against stocks only. Not a super-persuasive one to me, since I'm a stocks only guy right now, but an argument, nonetheless.

Predict? Or follow trends? That is a question worth pursuing.
_________________
I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[mtvk]

Bill,

Thanks for the trading based on the 50/90 moving averages.

I have read articles by http://www.quantext.com/subpage.html.
I was searching for Monte Carlo for asset allocation and found the link.

Geoff is saying its possible to come with uncorrelated stocks
to beat the market with equal risk. If that is true, then active
fund managers of hybrid funds can use such software to come with
right asset allocation and stocks to beat the market with low
risk. But he discredits the active fund management.

My thinking is if there is an algorithm that will predict the
best possible sectors, market, asset that would outperform
then any manager can use that and be ahead of the market.

The guys who advocate only investing in index funds,
have a software to find how much to buy each of the index fund.
At the same time they discredit active management. Why
not an active manager use the same logic and come up
with right amount of cash, bonds, stocks?

[nodoodahs]

You've read the EZ missive; I have been backtesting and found that a 50/90 exponential moving average cross is the cat's meow for the S&P 500 in terms of defining a "bull market" for inactive traders (2 trades every 3 years).

Single moving averages have more whipsaws than crosses, but you can take that out by just looking at the chart once a month (or once a quarter). But too long an average, and you miss the start of the trend; too short, and you're fooled. Let history be your guide and backtest.

I have not checked the 50/90 against all the various asset classes - only so much time (there's that word again) in the day.
_________________
I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[rffrydr]

You found it, weak link in market based economies: time.

Put a market to something and the impulse will be to always get closer, finer, faster, quicker: Tickers, nternet quotes, floor quotes, specialist quotes, specialist's order books, elctronic exchangge of "pre-formated" orders, OTC. Companies YOY earnings, quarterly reports, mid-term "guidence" disclosure....Listings in mulitple time zones. 24hr trading....and (finally?!) 100th/sec clocks on CNBC ticket charts. Can YOU compete? No? Time to take a step back.

Step back far enough and you'll find an advantage. 200days on average is pretty good. Keeping it on average; out of emotions even better. You will still be putting money in on any given hour: leave that to your broker with a window for entry.

I like blending the seasonals in (in terms of weighting, not absolutes) and Dow Dogs into it.

But once you've decided to keep it simple, keep it simple. Your SP ETF will handle all that discrimination stuff for you. You can't get any more global than Coke; you can't get any more commodity intensive than Dow Chemical, Exxon or ADM...... Take it easy--that's your edge.

It's a system built on contradiction: "You can't drive in the rear-view mirror" they say. But there's a reason they put rearview mirrors in cars: you can't drive without them!
_________________
Today is the Tomorrow you worried about Yesterday!

[nodoodahs]

Stocks and commodities futures are less correlated than you might think. Companies hedge their costs and prices in the futures markets, trying to smooth their earnings over time, so spikes in gold, for example, may be better played in gold than in gold miners. Stocks also fall in and out of favor, so there are times that the commodities may be cheap (or expensive) relative to the stocks they represent. Finally, not all commodities have a "pure play" stock.

The essence of your proposed system is trend-following in relatively non-correlated markets. The goal is that, when one market is whipsawing you, some other market(s) are trending to compensate. You're gonna get whipsawed, no way to avoid it.

From what I've done, I think more than one MA is needed to establish what the trend is. I suggest you go here:
http://tradingblox.com/forum/index.php
and spend a lot of time reading about what these guys are doing, and see what is applicable to your situation.
_________________
I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[mtvk]

Bill,

Thanks for your feedbacks.

Few more questions:
1. Commodities asset class: why to have commodities asset class that uses the futures instead of broader stock market index since companies that are
tied to the commodities are already in the broader market index?

This paper gives some strategies using commodities with long/short,
but says not good about gsci itself: http://tinyurl.com/22ezxm Does this mean for small investor, to stay away from funds like DJP?

2. Timing model using 200 day sma, depends on trending markets.
What happens the market tends to go sideways for several years?
I could get long time historical chart for $spx but not for other asset classes. From your studies, do you think timing based on 200 sma
would result in less draw down but close enough to buy and hold?

[nodoodahs]

I don't have any comments on those specific ETFs or on your scenarios. You should back-test your ideas before executing.

Checking for trend only once a month, the "worst case" outcome is that every month, every position changes. 100 / 12 = 8.33, you could have eight classes (you list only seven) and never have to pay for a trade.

Slippage implies a defined entry point target price. I don't know that it's an appropriate term here. When you test, use a realistic entry price, like the next day's open, and you've captured that dynamic.

If it's a taxable account, then your testing of trading in/out should, over the long term, yield a gain at least 85/61 = approx 1.4 times as large as the buy/hold strategy (14% versus 10% for example) in order to pay the taxes. "Buy/hold" in this case means rebalances every "year plus a day" to get the long-term cap gains rate.
_________________
I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[mtvk]

Bill,

I was thinking to have just VTI 25%, EFA 20%, EEM 5%, TIP 15%, TLT 15%, VNQ 10% and DJP 10%.

If the fund is above 200 day sma, stay long otherwise be in money market
for that alloted %.

From what you are saying, each of the above ETFs could be sub divided
in to its constituent ETFs and use the same rule. Makes sense.

Wells Fargo gives only 100 free trades a year. Wanted to limit the
trading.

The slippage will take .5% away. Whipsaws may take out another .5%
to 1%. On top of these, is doing trades by following the rule every
month once. Seems its better to be long in all the asset classes
with yearly rebalance.

Here are the scenarios that I can think the portfolio should handle:
1. Goldilocks economy. interest rate is less, moderate growth,
moderate inflation. VTI, EFA should do well.
2. Too much inflation. TIP, DJP should do well.
3. Profit recession: TLT, TIP, VNQ should do well.
4. Stagflation: TIP, DJP should do well.

[nodoodahs]

You are off to a good start, if you're looking for a lazy way to beat the stock market with limited risk. While I believe a little more risk and a lot more activity can lead to larger outperformance, I realize that isn't for everyone, and what you're considering is smart, will outperform, and is very possible with ETFs in the context of an IRA. I have been playing and backtesting with this idea myself recently.

Look at different measures of trend instead of just the close versus the 200 dma; you might find something that works better.

Don't be confusing the interval of the average (daily, weekly) with your checking interval. You can use a daily average and just decide to only check it once a month.

The key in suggested asset classes is that, over LOOONNGG periods of time, they don't have strong correlations with each other. Can you separate REITs out of the U.S. stock component? Can you do ex-U.S. in different regions (Europe, Emerging, Asian) or even a country mix? Can you split commodities into different baskets (soft, base metals, precious metals, energy)?

A detail that must be considered is weighting. Let's say you decide to track five assets and three are trending: is it 1/3 each? What if only one is trending, do you do 100% in that one or is there some limit weight, and what is the alternative if nothing is trending? Cash? If all five are trending, is it 1/5 each?
_________________
I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[mtvk]

Thanks.

One more I found:

Instead of 200 day sma, use 40 week sma or 10 month sma.
This means checking for buy/sell is done weekly or monthly once.

On the topic of asset allocation:
Scott Burns suggested similar asset allocation. Only difference
is having energy fund instead of gsci commodity fund. May be
when he wrote the article a commodity index tracking fund wasn't there.

http://www.dallasnews.com/sharedcontent/dws/bus/scottburns/couchpotato/columns/stories/032005dnbussburns.153f93882.html

[nodoodahs]

Two suggestions:

Instead of a single close above/below 200 dma, you could use multiple consecutive closes above/below as your signal to buy/sell.

You could use a 2-moving average cross. Instead of close above/below 200 dma, you could use a shorter moving average being above/below 200 dma.
_________________
I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.