Quantifying the Value of SMA10 Trend Following

The 10-month simple moving average (SMA10) is a widely studied trend-following technical indicator for the U.S. stock market. How much value does it add? To investigate, we compare:

1. SMA10 – A strategy that is each month in SPDR S&P 500 ETF Trust (SPY) when the S&P 500 Index is above its SMA10 at the end of the prior month and iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) when below.
2. RAND SMA10 Average – Average performance of 100 trials of a strategy that is each month randomly in SPY or LQD, but with the selection tilted toward SPY to achieve about the same percentage of time in stocks as for the SMA10 strategy.

We focus on average monthly returns, standard deviations of monthly returns, monthly return/risk (average monthly return divided by standard deviation), along with compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). We also consider the number of SPY-LQD switches. Using monthly levels of the S&P 500 Index since October 2001 and monthly dividend-adjusted prices for SPY and LQD since July 2002 (limited by LQD), all through May 2022, we find that: (more…)