Distance Between Fast and Slow Price SMAs and Country Stock Index Returns

“Distance Between Fast and Slow Price SMAs and Stock Returns” finds that extreme distance between a 21-trading day simple moving average (SMA) and 200-trading day SMA, as applied to individual U.S. stock price series, may be a useful return predictor. Does this finding apply to non-U.S. stock market indexes? In their December 2023 paper entitled “Market Timing with Moving Average Distance: International Evidence”, Menachem Abudy, Guy Kaplanski and Yevgeny Mugerman test ability of the distance between fast and slow SMAs to predict future returns across 92 international stock market indexes. Specifically, they each month:

• Measure moving average distance (MAD) for each index as the ratio of its 30-calendar day SMA to its 300-calendar day SMA in local currencies.
• Sort the indexes according to MAD into fifths (quintiles) or tenths (deciles).
• Reform an equal-weighted hedge portfolio that is long indexes in the top quintile or decile with MAD values above one and short indexes in the bottom quintile or decile with MAD values below one.
• Adjust portfolio returns to U.S. dollars via local currency exchange rates.

They consider the full sample of 92 indexes and three subsamples: (1) 46 countries with the highest United Nations development ratings; (2) the MSCI 25 developed markets; and, (3) the MSCI 30 emerging markets. Their benchmarks are buy-and-hold the MSCI World Index (large and mid-size firms in 23 developed countries) and the S&P Global 1200 (30 markets representing about 70% of global market capitalization). Using daily levels of 92 international stock market indexes as available since June 1980, associated U.S. dollar exchange rates and international stock factor model returns, all through November 2020, they find that: (more…)