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Moving averages: S&P ends April up 1.46%

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The S&P 500 closed April with a monthly gain of 1.46%, after gaining 3.51% in March. At this point, after the close on the last day of the month, two of the five Ivy Portfolio ETFs — Vanguard Real Estate ETF (VNQ) And Invesco DB Commodity Index Tracking Fund (DBC) – signal “cash”, unchanged from last month’s last double “cash” signal.

If a position is within 2% of a signal, it is highlighted in yellow.

The Ivy Wallet

The second table above shows the current 10-month simple moving average (SMA) signal for each of the five ETFs featured in The Ivy Wallet. The third table shows the 12-month SMAs for the same ETFs for this popular alternative strategy.

For a fascinating analysis of the Ivy portfolio strategy, check out this article by Adam Butler, Mike Philbrick, and Rodrigo Gordillo:

Backtest moving averages

Over the past few years, we’ve used Excel to track the performance of various moving average timing strategies. But now we use the backtesting tools available on the ETFReplay.com website. Anyone interested in market timing with ETFs should check out this website. Here are the two tools I use most often:

Moving Averages Background

Buying and selling based on a moving average of monthly closes can be an effective strategy to manage the risk of large losses in major bear markets. Essentially, when the monthly close of the index is above the moving average value, you own the index. When the index closes below, you switch to cash. The downside is that it never takes you out the top or bottom. Also, it can occasionally produce a circular saw signal (short-term buy or sell signal), which I have seen most recently in 2020.

Nonetheless, a chart of the S&P 500’s monthly closes since 1995 shows that a 10- or 12-month simple moving average (SMA) strategy would have ensured participation in most of the upside price movement while significantly reducing losses.

Moving averages: S&P ends April up 1.46%

Here is the 12 month variant:

Moving averages: S&P ends April up 1.46%

The 10-month exponential moving average (EMA) is a slight variant of the simple moving average. This version mathematically increases the weighting of the most recent data in the 10 month sequence. Since 1995, it has produced fewer whipsaws than the equivalent simple moving average, although it was a slower month to signal a selloff after those two market tops.

Moving averages: S&P ends April up 1.46%

A return to the 10- and 12-month moving averages of the Dow during the 1929 Crash and Great Depression shows the effectiveness of these strategies in these dangerous times.

The Psychology of Momentum Signals

Timing works because of a fundamental human trait. People imitate successful behavior. When they hear that others are making money in the market, they buy. Finally, the trend is reversed. It may just be the normal expansions and contractions of the business cycle. Sometimes the cause is more dramatic – an asset bubble, a major war, a pandemic, or an unexpected financial shock. When the trend reverses, successful investors sell early. The imitation of success gradually transforms the previous buying momentum into selling momentum.

Strategy implementation

Our illustrations of the S&P 500 are just that – illustrations. We use the S&P because of the extensive historical data readily available. However, followers of a moving average strategy should make buy/sell decisions on the signals of each specific investment, not on a broad index. Even if you invest in a fund that tracks the S&P 500 (eg Vanguard’s VFINX or SPY ETF), the moving average signals for the funds will sometimes differ from the underlying index due to the reinvestment of dividends. The S&P 500 numbers in our illustrations exclude dividends.

The strategy is most effective in a tax-efficient account with a low-cost brokerage service. You want the winnings for yourself, not your broker or your Uncle Sam.

Note: For anyone who would like to see the S&P 500 10 and 12 month simple moving averages and stock versus cash positions since 1950, Click here for an Excel file (xlsx format) of the data. Our source for monthly closings (column B) is Yahoo! Finance. Columns D and F show the positions signaled by the month-end close for the two SMA strategies.

Recommended Reading

In the past I have recommended Mebane Faber’s thoughtful article A quantitative approach to tactical asset allocation. The article has now been updated and supplemented as Part Three: Active Management in his book The Ivy Wallet, co-written with Eric Richardson. This is a “must read” for anyone considering the use of a timing signal for investment decisions.

The book analyzes the application of moving averages of the S&P 500 and four other asset classes: the Morgan Stanley Capital International EAFE Index (MSCI EAFE), the Goldman Sachs Commodity Index (GSCI), the National Association of Real Estate Investment Trusts (NAREIT) and 10-year US Government Treasury Bills.

As a regular feature of this website, we update signals at the end of every month.

Check out the Ivy Portfolio ETFs here: Vanguard Total Stock Market ETF (VTI), Vanguard FTSE All-World ex-US Index Fund (VEU), iShares 7-10 Year Treasury Bond ETF (IEF), Vanguard Real Estate ETF (VNQ), And Invesco DB Commodity Index Tracking Fund (DBC).

For more information about Mebane Faber, please visit his website, Research Mebane Faber.

Valid until market close on May 31, 2023.

Initially published by Advisor Perspectives on April 28, 2023.

For more news, information and analysis, visit the Chain of innovative ETFs.


Footnote on calculating monthly moving averages: If you do your own moving average calculations for dividend-paying stocks or ETFs, you’ll sometimes get different results if you don’t adjust for dividends. For example, in 2012, VNQ remained invested at the end of November based on adjusted monthly closes, but there was a sell signal if you ignored the dividend adjustments. Since data for previous months will change when dividends are paid, you must update data for all months in the calculation if a dividend has been paid since the previous month-end. This will be the case for all stocks or funds paying dividends.

Learn more at ETFtrends.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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