17 Pages Posted: 31 May 2010
Date Written: April 18, 2010
The method previously devised to harvest most of the potential gain in bull markets while avoiding most of the pain in bear markets is improved to provide greater accuracy and minimize whipsaw trading that can occur in some cases. The basic method focuses on a buy-the-market and hold strategy when measured volatility is low. When this condition is violated, a moving average look-back (MALB) algorithm is employed which has the investor in a long position at day n if and only if the ratio of the 200-day moving average at day n-1 to the same average at day n-21 exceeds a specified fixed value corresponding to a specified rate of return in the 20-day period. Otherwise, a cash position is taken. The method is applied to 6 of the most popular ETFs, yielding a highly diversified portfolio, and the results are shown to achieve the stated goal with an average of less than 1 trade per year.
Modest improvement can be obtained by extending the MALB method with windowed short selling. This can be accomplished without increasing maximum drawdown albeit requiring a somewhat increased trading frequency. Finally, it is shown that a peculiar characteristic of inverse ETFs might be utilized as an alternate to the short selling approach.
Keywords: Market timing, ETFs, Inverse ETFs, MALBV
JEL Classification: B41, C12, C51, C52, C53, C87, G10
Suggested Citation: Suggested Citation