Timing the market using moving averages - an experiment

[Wolverine]

March report and things are getting serious. There has been a big miss on the 20D-4 strategy, which is now greatly behind the other ones who have just bought and held so far. To be transparent, I’ve had some doubts about the sense of this kind of market timing during the month, especially when comparing the time spent following the market’s movements vs logging in once a month to buy with available funds and then hold forever.

These are just a set of circumstances, though, so there’s plenty of time for me to change my mind in the other direction going on if some big downturn happens and I get scared with my invested funds. Even if I fully stoped believing in the strategies I’m using here, I think the experiment would be worth pursuing, be it only to illustrate how vain this endeavour is.

On the other side of the coin, I went into this believing that keeping on despite false positives was the hard part, so I’ll just shrug this off and keep on. I’m curious to see where this all is leading.

Triggers

March was a continuation of the previous drops at first, then an awesome recovery from the 10th onward, starting right after the exit trigger of the 20D-4 strategy was hit, provoking a magnificent rebound right when I went out, without fail. It’s true that it’s hard to time the bottom, because the recovery can come quickly. I’d need a significantly bigger drop for one of these strategies to shine.

Time-weighted returns

Can you spot the laggard?

Real data

The difference is significant, though a bit less visible. It’ll compound from now on.

Mood: welcoming the learning experiences: this enlightens my other investments. I have considered switching strategy toward a more buying and holding-ish one with my taxable investments at some point.

	20D-4	200D-10	Bench.
TW Returns
CAGR	7.6%	13.0%	13.0%
March 22	-1.1%	3.5%	3.5%
YTD	-9.2%	-2.7%	-2.8%
Max DD
All times	-14.1%	-12.1%	-12.1%
March	-5.5%	-5.5%	-5.5%
YTD	-13.7%	-11.7%	-11.7%

The max drawdown has increased in March as it goes from November 17 2021 to March 9 2022. It could go deeper still yet previous gains were good enough that the annualized returns are still attractive.

As stated before, the 20D-4 strategy does not guarantee a downside protection and could keep falling lower than the other two in the future.

[Wolverine]

As an additional personal trivia: an observation I’ve made is that since I’ve started this thread, I’m trying to anticipate the direction in which the market will be moving. While I’m for the time being not too wrong about it, it appears that by the time I’m feeling confident enough to act on it with other investments, other market participants have already acted and it’s hard to make money trading on it.

It’s true that it’s not enough to be right, but that one has to be right before the others. It turns out there’s a reason the proper time for action would be when I’m not yet confident enough so I have to either decide to gamble and act without confidence in my bet, or accept that I’m not quick enough to beat the market.

It’s not intuitive. I really had to experience it to realize that, yes, even when being right and pretty early, it still already is too late to benefit from it. I encourage those who feel they could beat the market to launch a small experiment with a small amount of funds and use it to act on their predictions/beliefs while comparing it to the market performance. It’s been enlightening to me.

[Wolverine]

@TeaCup

Trendfollowers that reach the stage of first wrong signals generall invest a few years optimizing their models aka adding filters to distinguish noise from „real“ signals.

The problem I see with that is that you are really only optimising to take into account the precise specific conditions you have just met, so you shield yourself against those precise conditions, but create other vulnerabilities and/or are still not shielded against other conditions you have not yet thought of.

Whatever you do, you’ll still be at a border: when you get in/out/shift your allocation, you enter a period of vulnerability where you are bound to be on the loosing side if the market doesn’t behave in the way required by your strategy. You can adjust your strategy to shift your window of vulnerability, but there will always be one and there will never be a guarantee that the market will actually go in the direction you need it to when you’re in the vulnerability stage.

The question I still have is in regards to statistics. Sure, you’re bound to loose sometimes but can you expect to get ahead in the end if you play the odds enough time and go through enough diverse conditions that you meet those that are more favourable to your strategy? My bet is on “no”, but I like first hand experience. In the meantime, I’m consolidating my global portfolio strategy to consolidate the building of my emergency fund while still being agressive and get out of momentum strategies for the time being.

Now, if we are being really honest, I feel that the truly hard part is giving up on the idea that we can get better returns than others and get richer than them in a quicker timeframe. Settling for being ordinary, and accepting that other aspects of our life matter more and we should focus on them is very hard (to me, at least).

The real wisdom is in accepting to deal with reality and, rather than clinging on to unrealistic dreams, to build and bring to life realistic ones. That wisdom tends to come pretty late and is faced with the sunken cost fallacy (“I’ve already wasted too much time doing mistakes, I need a quick way moving forward, there’s no time for the proven one!”).

I am very subject to that and still feel that it’s already too late for a few things I’ll never get to do differently in my life. Giving up on them and moving forward is very hard. I am not there yet.

[ItalianEngineer]

how is it going with the fluctuations due to the Ukrainian war?

I think this was (unfortunately, accounting that this created deaths and worst crimes that only in a war can come) the best proof that staying invested is always the best option, at least for normal retail investors.

Do you agree on this latest statement?

[Wolverine]

We’ve gone up bigly and quickly, we are now going down slowly but there’s still a ways to go before hitting a trigger.

I don’t think the Ukrainian war is the main driver of what we’re seeing in the stock market. I think the Fed and inflation expectations (leading to prognostics on the Fed’s future stance) are the main drivers. Investors are flush with cash, so when they adapt to the Fed stance becoming more hawkish and get out of the stock market, they retain their investing power and can get back in biggly when they feel like it. We may be in for some more big volatility and flip flopping until tightening actually occurs and there is less money going around.

Of course, we could say that the war added to inflationary pressures but with the wage-price spiral that had started (and seems to have been tamed for now), the supply chain issues still not sorted (and China going into lockdowns again), transportation firms benefitting from this chaos (so having no incentive to sort it out) and central banks still being very accomodative, we may be in a similar place now even without the war (with a few less ups and downs and maybe energy and food prices a tad lower). We are now going into earnings season, so stock prices could move either way.

@ItalianEngineer

I think this was (unfortunately, accounting that this created deaths and worst crimes that only in a war can come) the best proof that staying invested is always the best option, at least for normal retail investors.

Do you agree on this latest statement?

I’d say it depends what you are trying to achieve. My main regret during this has been not buying when prices where/are below my average cost basis, but stock prices haven’t gotten really low as of now. I may think differently if we had had some real crash (which could still happen) and I had some assets accumulated already which would have lost face value.

My main conclusion would be that it’s not worth the time spent in it, which would go in the direction of your statement but there again, I believe I’d not mind keeping buying lower and lower if stock prices went down and down and up and down some more for a prolonged period of time but I’ve read enough 2008 threads to know that there are people who felt bad and lost sleep during times like that (though you may argue that 2008 was special since it was the financial system and banks themselves that were in jeopardy) and that they may have slept better with cash on the side (though not above the insured thresold in a bank).

My real take is we ain’t seen nothing yet (not saying we’re going to see a deep crash in the near future, could be years until it happens, or it could never happen at all) and it’s way too early to draw real conclusions for the time being.

[Wolverine]

How’d y’all folks like another ride?

Exit trigger hit on the 20D-4 strategy. Let’s see if thrice’s the charm.

[Wolverine]

April’s numbers are out! If you like red, you will love this.

Triggers

It’s been a downward slope all the way, ending with the 20D-4 exit trigger to be hit. The funds have been divested today, so the 3 funds have been invested for the month.

Time-weighted returns

We can see the price of missed timings. Note that the downward protection provided by the 20D-4 strategy is non existent in these circumstances so far.

Real data

The month has mostly eaten up the new CHF 100 input. While it didn’t hurt while dealing with the charts here, it did have me ponder while compiling my net worth to realize that my 3a’s where down for the month (including new inputs). I hadn’t followed the behavior of the funds closely enough to expect it (which is actually good news).

Mood: starting to consider that this downturn counts for something. Bracing for more.

	20D-4	200D-10	Bench.
TW Returns
CAGR	4.1%	9.0%	8.9%
April 22	-4.3%	-4.3%	-4.3%
YTD	-13.1%	-7.0%	-7.0%
Max DD
All times	-15.7%	-12.1%	-12.1%
April 22	-6.1%	-6.1%	-6.1%
YTD	-15.2%	-11.7%	-11.7%

While the 9% CAGR of the passive strategy is still something, the 4.1% of the 20D-4 is far less impressive. We could get negative time-weighted returns in the near future.

The 15.7% drawdown is hurting a bit too. It could accrue more if the recent exit happens to be a false positive again.

[Wolverine]

Well, by my metrics, we have officially reached larger drawdown territory as the 200D-10% SMA exit trigger has been reached. Since the value of the fund share is displayed with a 1 day delay, Monday will be an up day (given todays gains in the US and CH at the very least), but daily swings don’t matter for this strategy. We’ll get to see different results for all 3 strategies from now on. Good times!

No emotions attached for now, but active investing on my taxable portfolio is taking my attention away from the numbers of these accounts, so I’m not really emotionally invested in these drawdowns for now.

Mood: serene.

[Wolverine]

Well, the fun has only started. The entry trigger for the 20D-4 strategy got hit today. This move has been beneficial this far but the money won’t be invested until Wednesday so anything goes. Tomorrow is end of month feedback day, we’ll dive deeper on this then.

Mood: unbothered.

[Wolverine]

So, May has been an… interesting time.

A decent amount of volatility in the benchmark. We’ve hit a new low and rebounced from there.
The 20D-4 strategy has been out of the markets for its whole duration (then got reinvested on June 1st evening)
We’ve crossed the 200D-10 exit trigger.

Just as a spoiler and despite the chart looking ugly, here’s how the month looked, with the appearance of the green 200D-10 line:

Triggers

Predicting the future is hard and with the swings we are having this year, I’m glad I don’t have to do it (for context, I had started trying to do it with other funds and gave up on it at the start of April). Getting out with the 200D-10 strategy will only be beneficial if we see a very deep downturn, so things are becoming interesting.

Time-weighted returns

The 20D-4 strategy gained a tiny bit of its returns back against the benchmark which, with the funds now being invested again, is now official. That strategy behaves by small jumps in and out, focusing on small bets and getting back in quickly when the markets rebounce.

The 200D-10 strategy is now out and only a very deep drawdown in the markets would prove it positive. Unlike the 20D-4, it should be reliable in setting a hard lower level limit, so giving more confidence as to the availability of the funds during a dowturn. We’ll see how that goes.

Real data

Not much to say, here. We’ll see how this behaves with subsequent new contributions.

Mood: king of detached from this experiment at the moment, it’s set and rolling, we’ll see how it goes.

	20D-4	200D-10	Bench.
TW Returns
CAGR	3.9%	6.0%	6.9%
May 22	0.0%	-3.6%	-2.3%
YTD	-13.1%	-10.3%	-9.1%
Max DD
All time	-15.7%	-13.0%	-13.5%
May 22	0.0%	-5.5%	-6.1%
YTD	-15.2%	-12.5%	-13.1%

In terms of returns, the buy and hold approach wins so far. The only benefit of the market-timing strategies so far has been limiting the short term volatility of the invested funds.

[Wolverine]

Well, well, well, guess where we’re back at?

20D-4 exit trigger reached once again, the funds are getting divested.

At this point (well, in two days when the selling will actually have occurred):
The 20D-4 funds are (will be) out.
The 200D-10 funds are out.
The benchmark funds are still in (and will remain so, of course).

[Wolverine]

So, I was wondering today why I hadn’t received a notification for the divesting of the funds yet and it appears that I have failed you, my friends…

Changing the investing mode from automatic to manual takes a few minutes and I forgot to check back in after that to actually order the sale of the assets (because without the actual order, entering manual mode doesn’t do me any good).

I’ll add a curve for the theoretical place where the strategy should be, though this is also an example of the kinds of risks I am exposed to with these strategies. I guess one could automate the sales and buys and link it to the triggers but I don’t have much trust in automated trading.

[Wolverine]

I guess it would be a good idea to make the June update before an entry trigger gets hit. Sorry for the delay.

Triggers

It seems people in June have decided that inflation was a bigger deal than expected (shocker, I know) and the passive strategy took a big hit around the 10th-13th, which took us into bear market territory. The 200D-10 has been in cash all month long. The 20D-4 has started the month invested, then hit an exit trigger on which I failed to act immediately (I took a 2 days delay). Both the 200D-10 and 20D-4 are currently sitting in cash.

Time-weighted returns

The dashed yellow line is where the 20D-4 would be sitting if I hadn’t missed the exit trigger, the full line is where I am actually sitting. Since stocks can go up bigly in a short timeframe, it’s not possible yet to assess if these exit moves where beneficial or not when compared to the passive strategy.

Real data

New contributions tend to offset the losses. I’ll call where I stand “flat”. Exiting with the 200D-10 provides downside protection but could also cost some gains upon re-entry.

Mood: still pretty detached, as displayed by me missing a trigger and this late update.

	20D-4	Th. 20D-4	200D-10	Bench.
TW Returns
CAGR	-1.5%	-0.4%	6.0%	2.1%
June 22	-8.1%	-6.4%	0.0%	-7.1%
YTD	-20.2%	-18.7%	-10.3%	-15.5%
Max DD
All time	-22.3%	-20.4%	-13.0%	-18.6%
June 22	-10.1%	-8.0%	0.0%	-10.1%
YTD	-21.9%	-20.0%	-12.5%	-18.2%

I’ve added the “Th. 20D-4” column for where the 20D-4 would have stood if applied adequately on each trigger. Both it and the actual 20D-4 results have entered negative CAGR, though I’m sure it’ll get positive again when stocks will have recovered.

[Wolverine]

Well, just in time. Entry trigger on the 20D-4 hit:

[Wolverine]

I am very late for the July update. July’s been an up month, and so has been August until last week (though we are now trending down so things may happen in the near future).

Quarterly fees have been collected by Frankly, so even out of the market strategies have had a small decrease.

Situation at the start of the month
The 20D SMA -4 strategy started off out of the market.
The 200D SMA -10 strategy started and ended the month out of the market. It is still uninvested as of now.

Triggers

The 20D-4 strategy hit a trigger on the 8th of July and got invested by the 13th.
The 200D-10 strategy stayed uninvested all month long (and still is).

Time-weighted returns

The 20D-4 exit and re-entry has been at a loss of roughly 2.5% vs blindly staying invested. This was helped by me forgetting to exit on time in June but I consider that part of the game and am registering the full loss as a result of the attempt. It has now triggered 4 times and only the 3rd has been successful. The total loss vs the market is currently at -8.3%.

Nothing can be said about the 200D-10 strategy’s behavior until it re-enters the market, which may take some time.

Real data

Back to all time highs with the 200D-10 strategy and the benchmark by the power of new contributions at the start of the investing career, when accrued assets are still low.

Mood: pretty detached (hence the late updates). The bottom could have been reached or this may just be a bear rally, waiting for late autumn to fall lower.

	20D-4	Th. 20D-4	200D-10	Bench.
TW Returns
CAGR	0.3%	1.3%	5.3%	4.4%
July 22	3.0%	3.0%	-0.1%	4.4%
YTD	-17.8%	-16.3%	-10.4%	-11.8%
Max DD
All time	-22.4%	-20.9%	-13.0%	-18.6%
July 22	-1.7%	-1.7%	-0.1%	-2.3%
YTD	-22.0%	-20.5%	-12.5%	-18.2%

Back in (slightly) positive CAGR territory for the 20D-4 strategy. The max drawdown of the 20D-4 strategy has hit a new low at -22.3%.

For the curious among you, this is where we stand today, on the 23rd of August:

There is room to go for both strategies but if we keep going down the way we have these last two days, the 20D-4 exit trigger may be hit shortly.

[Wolverine]

August update. You’ll probably hear more from me very soon since the 20D-4 trigger is close to get hit.

August was an up month until Jerome Powell talked and made it very clear that the FED was not going to shift to an easing policy after just one month of not negative US CPI evolution. As far as I’m concerned, the market is now making sense again and despite the recent quick down trend, I find there is a good amount of comfort in that thought.

Situation at the start of the month
The 20D SMA -4 strategy was invested.
The 200D SMA-10 strategy was out of the market.

Triggers

No trigger has been hit. The 200D-10 strategy needs a lot to move and the June-August uptrend wasn’t quite enough for that. The 20D-4 strategy is poised to cross the exit trigger again soon.

Time-weighted returns

The buy and hold benchmark strategy has crossed over and back under the 200D-10 strategy, though there’s no conclusion that can be drawn for now, given how insensitive the 200D-10 strategy is.
The 20D-4 strategy is loosing for now.

Real data

New contributions still have a big impact, lessening the effect of market fluctuations. There’s no really significant difference in the outcome of the 3 strategies for now.

Mood: interested again, though in a positive way (the market reactions seem to align with my outlook of the economic situation, so things are getting more into what I feel is my control zone again). My bet is that we’ll have a general downtrend until roughly March next year, as the winter and the effects of the tightening policies of central banks start to affect investors confidence and available assets. That could come with temporary and powerful uptrends, though. The market indeed can remain irrational longer than I can remain solvent, afterall.

	20D-4	Th. 20D-4	200D-10	Bench.
TW Returns
CAGR	-0.8%	0.2%	5.1%	3.1%
August 22	-2.0%	-2.0%	0.0%	-2.0%
YTD	-19.4%	-17.9%	-10.4%	-13.5%
Max DD
All time	-22.4%	-20.9%	-13.0%	-18.6%
August 22	-4.7%	-4.7%	0.0%	-4.7%
YTD	-22.0%	-20.5%	-12.5%	-18.2%

A down month overall.

[expatriate]

Thanks for keeping up posting!

[Wolverine]

It fought well and hard to the point of really baffling me but the 20D-4 Strategy finally surrendered and breached its exit point.

It may have had a bit more resiliency built in it than I would have liked in these circumstances. xD

[ItalianEngineer]

This trial is getting more and more interesting.

Did you also studied other numerical methods before going for moving averages?

[Wolverine]

I’ve restrained myself to moving averages, though I’ve tested simple and several kinds of exponential moving averages, with signals either at intersections with the main curve, a smoothed version of it, a translated version of it or several moving averages.

These are the two strategies I have the most confidence in, with more confidence in the 20D-4 SMA than in the 200D-10. One of the assumption was that results would only present any sort of significance over a long period of time, going through several kinds of market conditions. It is fortuitous that we are going through this this early.