A subscriber asked whether limiting choices in the Simple Asset Class ETF Momentum Strategy (SACEMS) to IWB, IWM, RWR, EFA and EEM (TLT, GLD, DBC and Cash) when above (below) the 200-day simple moving average improves model performance. To investigate, we assume the simple moving average (SMA) is for the S&P 500 Index as proxy for the equity market and use a 10-month rather than 200-day SMA to simplify calculations. If we interpret the equity market to be in a bull (bear) state when the S&P 500 Index is above (below) its 10-month SMA, the question is whether limiting momentum strategy choices to equity-like (alternative class) assets during equity bull (bear) markets is advantageous. Specifically, we test this combination strategy on the following eight asset class exchange-traded funds (ETF), plus cash:
PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 1000 Index (IWB)
iShares Russell 2000 Index (IWM)
SPDR Dow Jones REIT (RWR)
iShares Barclays 20+ Year Treasury Bond (TLT)
3-month Treasury bills (Cash)
At the end of each month, when the S&P 500 Index is above (below) its 10-month SMA, we allocate all funds to the equity-like (alternative class) asset with the highest total return over the past five months. Using monthly closes for the S&P 500 Index since April 2002 and adjusted closing prices for the asset class proxies and the yield for Cash since July 2002 (or inception if not available then) through November 2012, we find that: Keep Reading