Using Simple Technical Analysis Indicators for Asset Allocation Decisions
13 Pages Posted: 9 Jan 2021
Date Written: April 18, 2020
This study analyzes the potential effectiveness of using simple technical analysis indicators to determine the overall riskiness of portfolio asset allocation. Using the 200-day simple moving average of the S&P500 as our technical indicator in two separate strategies, we employ a “risk-on” asset allocation strategy (more portfolio allocation in stocks as a percentage) when the S&P500 is above the indicator line and a “risk-off” strategy (less stock/more bond allocation) when below. We compare the “buy and hold” returns of various portfolio allocations in the U.S. stock and bond markets from 1962-2017. In the initial analysis, we find that following this rule with the 200-day simple moving average provides excess annual returns of up to 0.59%, with all analyzed allocation combinations posting both excess returns and a reduction in overall risk for all analyzed allocation combinations, with all 200-day strategies posting an increase in Sharpe ratios when compared to their baseline “buy-and-hold” strategy.
Keywords: technical analysis, trading strategies, simple moving average
JEL Classification: G11, G02, G14
Suggested Citation: Suggested Citation