The 10-Month Moving Average Strategy

JC Parets
April 8, 2020

Earlier this week, I put out a note about what I've been telling friends and family when they come asking. It comes with the territory right? I'm sure many of you are being sought after in similar ways. It makes sense for this environment.

But the truth is, I underestimated just how much this post would resonate with people. So much so, that I figured I'd write a follow up about another popular, yet simple strategy that I learned a long time ago.

To recap, what the Family & Friends post was about, was the percentage of stocks on the NYSE above their 200 day moving average. Historically, it's when we're above 15% and rising that it makes the most sense to own stocks. When we're below that, it's further evidence that stocks are a mess.

The reason I like it is because it's a very infrequent signal, only helpful after severe corrections, and it's free for anyone to follow. What more can you ask for to give your loved ones an inside look as to how the market works. They're fascinated by the fact that mathematically, the indexes cannot go up without more stocks going up. But that's just the way the market works. It's basic arithmetic.

The reason I prefer the NYSE over the S&P500, let's say, is because of the International exposure in the NYSE Composite. Remember, over half of the largest 100 stocks on the NYSE are foreign companies. The Nasdaq100 will give you much different data.

Great JC, but this only helps us buy dips. How do we know when to get out? 

Well, it is true. This indicator does not help us get more defensive ahead of the tsunami. We have other tools for that. Similar to how we don't want to brush our teeth with a hammer. We have different tools for different environments.

So today I wanted to show you another very simple tool that you can keep handy for future cycles.

This is a Monthly Candlestick chart of the S&P500 with a 10 month simple moving average. The longer-term strategy here is simply: Be long if we're closing above the 10-period smoothing mechanism and cash if we close below it:

Click on Chart to Zoom in

There are ways to enhance this strategy. You can play around with exponential moving averages. You can add maybe a macd crossover confirmation signal somewhere intra-month for better timing. Just understand the vulnerability to whipsaws and some of the advantages of keeping things simpler.

I just wanted to share this with you maybe it inspires you to build your own system. Or maybe you'll just use something like this one. Either way, I don't recommend that anyone just use 1 signal, or 1 indicator. That's silly. But if you're asking me about something I can point to that could be a good starting point for building a longer-term trend following system?

I've seen way worse strategies than buying and selling based on a 10-month moving average.

Something else I want to reiterate is that neither one of these tools are for everyone. We all have different time horizons, objectives and risk parameters. In fact, these tools are probably way too slow for many investors. But I know some of the biggest institutions in the world who manage billions in assets using these very same tools and/or slight variations of them. Some of them will even admit it ;)

So just understand who you are. Why are you here? What's your time horizon? How much risk are you willing to take? And most importantly, will you stick to your rules?

These are the things that determine success or failure.

JC

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