I stumbled across the chart below while hanging out on stocktwits a few months ago. It is a monthly chart of the S&P 500 with a 10 month EMA (exponential moving average). We could have made a boat load of money simply by going long when the S&P 500 is above the moving average and going short or to cash when it is below.
My eyes lit up when I first saw this chart. However, the problem with moving averages is that they always lag at the turn. If we were waiting on the S&P 500 to move above the 10 month EMA, to go long, we would have missed the current move off the bottom. I believe a better way to use this indicator is as a guide for money management.
Last year we did a great job navigating our subscribers through a most brutal market. Our portfolio was down -8% vs. -40% for the market. I recall every time I felt the worst had past and added one more long position – the market took another nasty spill. What if I had simply had a rule that whenever the S&P 500 was below the 10 month EMA – to maintain a cash position of X%.
I have no way to measure how much a rule like that would have improved my performance, but I am quite certain it would have. I joked about an upcoming throttling too many times for it not to have helped.
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