Relative Strength of Indexes as a Future Return Indicator
June 6, 2016 - Technical Trading
A reader requested confirmation of findings in the article “A Simple & Powerful Timing Indicator” of May 2009, which examines the strength of the (risky) NASDAQ Composite Index relative to the (conservative) S&P 500 Index as a market timing indicator. The article cites the book Technical Analysis – Power Tools For Active Investors (copyright 2005 and second printing date May 2005) as the source for the indicator. The indicator is the ratio of weekly index levels (risky-to-conservative) with respect to the ratio’s 10-week simple moving average (SMA). The associated trading rule is to move from cash (stocks) to stocks (cash) when the weekly ratio crosses above (below) its 10-week SMA. The hypothesis is that a stronger (weaker) risky index indicates risk-on (risk-off) sentiment and therefore a strong (weak) stock market. Using weekly closes for the S&P 500 Index, the NASDAQ Composite Index, the dividend-adjusted SPDR S&P 500 (SPY) and the 13-week Treasury bill (T-bill) yield as available from late November 1992 (based on inception of SPY) through mid-May 2016, we find that: Keep Reading