Distance Between Fast and Slow Price SMAs and Stock Returns

Does degree of difference between fast and slow simple moving averages (SMA) for a stock price series predict future stock return? In the December 2023 revision of their paper entitled “Moving Average Distance as a Predictor of Equity Returns”, Doron Avramov, Guy Kaplanski and Avanidhar Subrahmanyam test distance between a 21-day SMA (SMA21) and 200-day SMA (SMA200) for the stock price series as a return predictor. Specifically, they each month:

• Calculate for each stock the SMA21-to-SMA200 ratio.
• Sort stocks into tenths (deciles) by this ratio.
• Calculate the standard deviation of the ratio across all stocks.
• Select stocks from the top decile with ratios greater than one plus one standard deviation for a long portfolio. Select stocks from the bottom decile with ratios less than one minus one standard deviation for a short portfolio. 
• Specify the Moving Average Distance (MAD) for a stock as 1 if it is in the long portfolio, -1 if it is in the short portfolio, and 0 otherwise. Stocks in the two portfolios are market capitalization-weighted.

They then assess the magnitude and reliability of MAD portfolio performance. They estimate breakeven trading frictions for MAD portfolios based on zero alpha relative to different factor models of stock returns. To assess uniqueness of MAD indications, they control for 18 firm characteristics and several technical indicators. Using daily prices adjusted for splits and dividends for publicly traded U.S. common stocks priced at least $5 during July 1977 through December 2018, they find that:

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