Market Timing with Moving Averages

68 Pages Posted: 10 Aug 2012 Last revised: 9 Nov 2012

See all articles by Paskalis Glabadanidis

Paskalis Glabadanidis

Essential Services Commission of South Australia

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Date Written: November 9, 2012


I present evidence that a moving average (MA) trading strategy third order stochastically dominates buying and holding the underlying asset in a mean-variance-skewness sense using monthly returns of value-weighted decile portfolios sorted by market size, book-to-market cash-flow-to-price, earnings-to-price, dividend-price, short-term reversal, medium-term momentum, long-term reversal and industry. The abnormal returns are largely insensitive to the four Carhart (1997) factors and produce economically and statistically significant alphas of between 10% and 15% per year after transaction costs. This performance is robust to different lags of the moving average and in subperiods while investor sentiment, liquidity risks, business cycles, up and down markets, and the default spread cannot fully account for its performance. The MA strategy works just as well with randomly generated returns and bootstrapped returns. I also report evidence regarding the profitability of the MA strategy in seven international stock markets. The performance of the MA strategies also holds for more than 18,000 individual stocks from the CRSP database. The substantial market timing ability of the MA strategy appears to be the main driver of the abnormal returns. The returns to the MA strategy resemble the returns of an imperfect at-the-money protective put strategy relative to the underlying portfolio. Furthermore, combining several MA strategies into a value/equal-weighted portfolio of MA strategies performs even better and represents a unified framework for security selection and market timing.

Keywords: Market timing, security selection, moving average, technical analysis, conditional models

JEL Classification: G11, G12, G14

Suggested Citation

Glabadanidis, Paskalis, Market Timing with Moving Averages (November 9, 2012). 25th Australasian Finance and Banking Conference 2012, Available at SSRN: or

Paskalis Glabadanidis (Contact Author)

Essential Services Commission of South Australia ( email )

Level 1, 151 Pirie Street
Adelaide, SA 5001