The MTI: Market Timing Indicator

My MTI is essentially a momentum tool. I calculated 4 moving averages on 45-years (actually March 12, 1963-December 31, 2007) of S&P 500 Index closing values. There are 24 permutations of 4 moving averages and 5 possible positions of the Index itself relative to these averages. For example, over the 44 years (nearly 11,400 trading days), the Index was above all 4 moving averages (the most bullish alignment) 53% of the time; it was below the 4 moving averages (the most bearish alignment) 18% of the time. Combining all possible moving average arrays and the position of the Index relative to them yields 120 possible combinations. In actual fact, only 93 of those possible combinations actually occurred and some for only a few days.

Rather than solve the question on a theoretical basis, I took a bull-in-a-china-shop approach. A $1000 portfolio of S&P stocks on 3/12/63 would have grown to $22,414 by 12/31/07 (the buy-and-hold strategy). I then back-tested on a binary basis (own or not own) each of the 93 combinations to determine whether, at the end of 45 years, the hypothetical portfolio of the SPY Index would have been higher or lower than the buy-and-hold strategy. Combining all the possibilities of these 93 combinations for every trading day on an "all-in" or "all-out" basis resulted in the $1000 growing to $50,171. And most aggressively, had the "all-out" days been fully-margined (150%)" then the $1000 would have grown to $258,602! Surprisingly, the back-testing didn't demand overly active trading activity. Over the 45 years, there weren't very many runs of less than 10 trading days and most ran up to 30-60 days.

Actually, due to the severe and deep collapse of the market in 2008, the MTI signaled an "all-out" cash position December 26, 2007 and hasn't yet signaled it safe to be back in and looks like it will be some time before the MTI signals it's safe (low risk of further decline) to fully reenter the market.

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