- Switching between stocks and bonds as signaled by a simple moving average crossover system of the S&P 500 – the MAC-US Timer – produces significantly higher returns than buy-and-hold stocks.
- The model has been updated from Aug-1965 to Jan-2017, conservatively assuming that funds are placed in the money market when not in the stock market.
The MAC-US Timer works as follows, with a buy signal and a sell signal triggering shifts from investment in the stock market to the money market, and vice versa.
Buy signal for the S&P 500
- A buy signal occurs when the 34-day exponential moving average (EMA) of the S&P 500 becomes greater than 1.001 times the 200-day EMA of the S&P 500.
Sell signal for the S&P 500
- A sell signal occurs when the 40-day simple moving average (SMA) of the S&P 500 crosses below the 200-day SMA of the S&P 500.
When a buy signal occurs, the whole investment goes into an S&P 500 index fund, and when a sell signal occurs all the funds are moved from the S&P 500 index fund to cash in the money market. Different moving average crossovers were chosen for the buy and sell signals in an attempt to prevent investment whipsaw situations.
The S&P 500 index fund is represented by a hypothetical fund SPY* based on the daily performance of the S&P 500 with dividends reinvested. SPY* was calculated by splicing the data from the SPDR S&P 500 ETF (SPY) from 1993 to 2016, the Vanguard 500 Index Fund (VFINX) from 1980 to 1993, and before that daily data of the S&P 500 adjusted for dividends with monthly dividends taken from the Shiller CAPE data.
The money market was simulated with a hypothetical fund SHV* using the daily Federal Funds Rate from 1965 to 2007 and thereafter by splicing the iShares Short Treasury Bond ETF (SHV) to it.
All trading is assumed to occur on the first trading day of the week after or when a signal from the MAC-US Timer was generated. A backtest of this model starting in 1965 provided the first buy signal for stocks on Aug-30-1965.
Over the period Aug-30-1965 to Jan-30-2017 the model, switching between SPY* and SHV*, showed an annualized return of 11.23% with a maximum drawdown of -19% in 1998. Buy-and-hold SPY* gave an annualized return of 8.92% with a maximum drawdown of -55% in 2009 (Figure-1).
Over the period 1/3/2000 to Jan-30-2017 the model showed an annualized return of 7.73% with a maximum drawdown of -17% in 2011. Buy-and-hold SPY* gave an annualized return of 4.58% with a maximum drawdown of -55% in 2009 (Figure-2).
There were 26 periods from 1965 to 2017 when the MAC Timer signaled to be in SPY* and 25 periods in SHV*. They are listed in the Appendix and are also shown by the vertical bars in Figure-3. Note that the MAC Timer signaled to be out of the stock market during the 1987 market collapse and the bear markets of 2001-03 and 2008-09.
The intention was to show the most conservative performance from this model by switching from stocks to cash, which over the period 1965 to 2017 provided 2.95 times the total return of what a constant investment in the S&P 500 with dividends reinvested would have produced.
Higher returns could have been achieved by using a longer term bond fund instead of a money market fund. For example, switching to the Vanguard GNMA fund VFIIX when not in stocks the model would have shown an annualized return of 12.01% from Aug-30-1965 to Jan-30-2017, and 9.50% over the period 1/3/2000 to Jan-30-2017. The bond fund return was calculated from the daily data of VFIIX (available from Jun-27-1980), and before that from the Federal Funds Rate.
The model is simple to construct, but can also be followed live at iMarketSignals.com. Heeding the weekly signals from the MAC-US Timer should provide insurance against major stock market declines and improve investment performance over longer time.
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Previous Articles on the MAC-US Timer
2012-09-10 The Improved MAC-System
2012-07-31 Beyond the Ultimate Death Cross