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Strategies & Market Trends : Raptor's Den II -- Ignore unavailable to you. Want to Upgrade?

To: HairBall who wrote (1809)	6/7/2004 4:53:02 PM
From: John Madarasz	Read Replies (1) \| Respond to of 3432

Hi LG, I sent your question to Rennie Yang over the weekend, who owns and runs Markettells. I haven't heard back from him yet, but I also mentioned to him not to feel obliged to reply if he was too busy to explain his scan model. He was kind enough to include this update in Sunday's commentary, so I hope it helps ;~) The excerpt is included below, and used only with express written permissions. I'm not directing this to you, but I always ask anyone who reads this excerpt here to respect Markettells copyrights and not reproduce this anywhere else without those same permissions...thxs. Best to you lg, jm There's been a lot of press recently concerning the S&P500 and its 50-day or 200-day moving averages. You've no doubt heard lines such as "The S&P successfully tested its 200-day moving average, encouraging investors to increase exposure" or "The S&P traded below its 50-day moving average today, leading to a wave of selling pressure." Such comments are based on a concept known as the 'moving average penetration', which simply means that when the S&P closes above its x-period moving average, it's bullish, and when it closes under the average it's bearish. This is one of those technical studies that is far more popular than it deserves, as history demonstrates that it's not particularly helpful in terms of market timing. For example, compared to a buy&hold strategy, which would be up approximately 1,100% since 1970, here's how the moving average penetration strategy would have performed using various popular moving averages of the S&P500... Simple Moving Average Penetration: 10-day moving average: +983% 20-day moving average: +166% 50-day moving average: +386% 200-day moving average: +821% Notice that the strategy underperformed a simple buy&hold over the last 30+ years regardless of the time frame. One point of interest, however, is that the penetration strategy can be improved upon significantly by switching from a simple moving average to an exponential moving average, which is calculated by applying a percentage of today's closing price to yesterday's moving average value. This method puts more weight toward recent data and less weight toward past data, and as you can see from the table below, this roughly doubles the performance figures for most moving averages using the penetration strategy... Exponential Moving Average Penetration: 10-day moving average: +1,846% 20-day moving average: +1,095% 50-day moving average: +811% 200-day moving average: +1,449% Instead of underperforming buy&hold, now we have two moving averages (the 10 and 200) that clearly outperform and only one that still underperforms (the 50 day). I still think this concept receives more attention than it deserves, as averages inherently lag the market and are therefore late in picking up on changes in trend. But if you do incorporate moving averages in your analysis, consider using an exponential average so that you're giving more weight to what's happened recently.