Are The Bulls Back?
I’m back from my trip, and it seems that the bulls are back also. There’s a peculiar sort of pain in sitting on the sidelines watching the market go up, and we have had that pain in spades over the last 8 days. When I sent out the special update, the bulls seemed to be running out of steam, with 4 doji candles (candles with a small body, signaling indecision among traders), on successive days and then Friday’s big red candle on higher volume seemed to confirm that the bull run had ended. But – the market makes fools of us all.
Friday saw a large green candle signaling that the bulls hadn’t run out of steam, or not just yet anyway. Such is life.
The only way to execute perfect trades that get in at the bottom and out at the top is in hindsight. We mere mortals who can’t see into the future have to depend on probabilities based on what has happened in the past. But we’ll look at the charts later in the blog.
I have had a lot of very helpful readers sending me strategies that work for them or that they have read, and I am working my way through them. I have looked at many backtesting systems and as yet haven’t found one that suits. They don’t have the functionality I need, and I would have to conform to their way of doing things, just being able to mess around with the parameters.
I think I have ‘NDH Syndrome’ (Not Developed Here) – which means that you tend to view systems that you haven’t developed with a very jaundiced eye. The systems I have looked at seem to me complicated and clunky, and they don’t do what I need. Hence, I am falling back on Excel – but I have to say that Excel really doesn’t like working on spreadsheets with 24,000+ rows, 40+ columns and lots of complicated formulae!
Three Moving Averages Strategy
This is one of the strategies that has been suggested. There are books about it and some brokers and websites are promoting it, so I thought it was worth checking out.
Basically, the strategy uses 3 moving averages, one short, one medium term and one long term. When they are in the order short > medium > long then you go long. When they are long > medium > short you go short.
They show some lovely charts. Here’s one showing a bull trade:
And one showing a bear trade:
They look pretty convincing, don’t they? No wonder people jump right in.
BUT – DOES IT WORK? None of the sites or brokers that I have visited did anything other than point to a few charts where it did work, and none gave any indication of how it performed on backtesting. The number of days they use for the MAs seemed very arbitrary. No reasons were given for choosing those particular parameters, you chose them depending on your:
‘trading objectives, style and preferences’
Helpful? Not really. And as for which ones worked the best, we are advised:
‘ There is no definitive answer to the best moving average crossover combination, as different mixes may work better for different traders, styles, markets and timeframes. ‘
Not good enough! We want to know.
We are going to backtest, starting in 1927 (before the big crash) and continue to the present day. Will it beat the market? Let’s check.
Here are the most used parameters for the moving averages. So which one is best? Let’s backtest.
(n.b.– the % of gains / losses is not accurate where the parameters are close (e.g. 5/10/20 because they are frequently the same figure and it is not counted. But the trades were ‘executed’.)
5 / 10 / 20
5 / 21 / 63
8 / 13 / 21
9/ 21 / 55
10/ 21 / 50
20/ 50 / 200
So, what can we deduce from the above results? Two things:
- Leveraged accounts ALL performed worse than unleveraged accounts, with several reducing to zero
- Using a shorter term MA1 produced better results than using a long one (unleveraged)
BUT – DID IT BEAT THE MARKET??
A resounding NO!
If we had just bought $100 worth of S&P 500 shares (yes, I know we can’t buy indexes, but work with me here) and sat on them, not adding or withdrawing, it would now be worth $24,000 (Open 30 Dec 1927: $17.66, Close 24 Oct 2023: $4247.68)
So – I’m not a fan of the Triple Moving Average Strategy. It seems like a lot of work to end up losing money!
I do get frustrated when websites and brokers push these strategies without any validation, it’s just a cool idea that someone thought up, and a few cherry-picked charts. Sounds good, looks good, but we’ve no idea whether it works or not!
To the markets . . .
It has been an annoying 2 weeks, with those of us in ITM SPY trades getting out on a death cross. SPYG was not affected so if you are following ITMS then you are still in the market and have recovered. Let’s check the charts.
The SPY chart has the death cross and the golden cross marked on it The golden cross is confirmed so we have an ITM ‘Get In’ signal. But let’s look to see what else we can deduce.
The downtrend line is still intact, but being challenged. If SPY breaks through it then that will be a very positive sign. If it bounces off, then not so good. We have a higher high than was reached in mid-October (good) but are yet to break through resistance around 445 (not so good).
We are currently trading at the levels last reached in mid September. The 200 SMA continues on the slope it has been on since early August. If the uptrend had continued, then SPY would be around 485 by now, which would have been nice.
So – what to do? We have a clear signal so getting back into the market is what the ITM strategy tells us. But you are the trader, and don’t have to do what anyone or anything tells you!
ITM got in in January at $400, and out last week at $418, so a rather meagre profit of 9 % at 100% leverage (strike $200, 50 % of current price). You can’t help but look at where we would be if we had stayed in the trade: a 20% profit. Annoying? You bet! But rule no 1: don’t lose money. We didn’t. But we have missed out on profits which is irritating.
The ITMS strategy did not have a death cross so you should still be in the trade. The golden cross was back in March when SPYG was trading at slightly less than $55, so you should be sitting on a profit of around 24% (36% annualised) at 100% leverage (strike of $28, 50% of current price), which is not earth-shattering but (as we say in Australia) ‘better than a poke in the eye with a burnt stick’.
SPYG seems to have just broken through resistance at $61, and is now in the 61 / 63 trading channel. A break through the $63 level would be very bullish.
We look at QQQ as it is an important index, but I have not back tested the ITM strategy on it, mainly because it only started in 1999 so there is not a lot of history. However, I trade it using the ITM strategy and it works well – BUT, I am not recommending it as I haven’t checked on a formal backtest, just observations. Thought: maybe I should do a backtest for next week?
Like SPYG, QQQ has not given an OUT signal so if you had gotten in on the golden cross in February when it was $311, you would now be sitting on a profit of around 44% at 100% leverage (strike $155, 50% of current price). Not earth-shattering, but works out at an annualized 59%. Not bad!
The VIX has dropped dramatically, and is now well below 20.
DOW Comparison Chart
You can see that QQQ has been outperforming both the S&P 500 and the DOW since September (which is why SPYG has also performed better) The Dow has been flat now for 12 months. It is not a good indicator of market conditions, having only 30 stocks in it, but it is always quoted, and people take a lot of notice of it so I have decided to include the comparison from time to time.
Gadding about . . .
Hard to believe that we go for months with no signals, but the 10 days I am away we have 2 signals!
I was in Melboune, staying in a ‘private gentlemen’s club’ which had the most fantastic building, so unlike anything else in Australia. Here’s the staircase:
The Melbourne cup is the richest race in the world, with a total prize money of $8 million (AUD). That’s it on my right.
The week ahead . . . .
Well, back into the market – the futures don’t look promising:
We can look at this in 2 ways: if you are twitchy you may want to stay out and see what happens – alternatively you can look on it as a good time to get in and buy.
Fingers crossed for a good week.
Questions & Comments
As always, happy to answer questions and receive comments (just be kind!)