This simple market timing model applies a 14-period Relative Strength Index (RSI) on a weekly chart of the S&P 500. Then, a 20-period moving average (MA) of the RSI is plotted. When the MA crosses from below to above 50, a buy signal is generated, indicating that the market has entered the accumulation phase (bull market). When the MA crosses from above to below 50, a sell signal is generated, indicating that the market has entered the distribution phase (bear market).
The model is extremely accurate in predicting major crashes and bear markets, such as the 2000 Tech Bubble and 2008 Housing Bubble. However, minor market corrections like the ones in 2010 and 2011 could "fool" the model into thinking that a major crash/bear market is coming when in reality, the market quickly rebounded following the short correction. The strength of the model lies in its ability to predict and avoid major crashes/bear markets, not small corrections. Additionally, the model cannot predict flash crashes (i.e., 1987).
Backtest results from 1970 to present day shows that this tactical model delivers nearly identical performance to buying and holding the S&P 500 (7.48% vs. 7.45% annualized return without trading costs factored in). However, thanks to its ability to avoid major crashes/bear markets, a hypothetical buy-and-hold portfolio holding just the S&P 500 would have experienced more volatility in its account value over time compared to a portfolio that tactically trades the S&P 500 based on this model.
Below is a link to backtest results:
docs.google.com...pt3geVFtkc/edit?usp=sharin...
The model is extremely accurate in predicting major crashes and bear markets, such as the 2000 Tech Bubble and 2008 Housing Bubble. However, minor market corrections like the ones in 2010 and 2011 could "fool" the model into thinking that a major crash/bear market is coming when in reality, the market quickly rebounded following the short correction. The strength of the model lies in its ability to predict and avoid major crashes/bear markets, not small corrections. Additionally, the model cannot predict flash crashes (i.e., 1987).
Backtest results from 1970 to present day shows that this tactical model delivers nearly identical performance to buying and holding the S&P 500 (7.48% vs. 7.45% annualized return without trading costs factored in). However, thanks to its ability to avoid major crashes/bear markets, a hypothetical buy-and-hold portfolio holding just the S&P 500 would have experienced more volatility in its account value over time compared to a portfolio that tactically trades the S&P 500 based on this model.
Below is a link to backtest results:
docs.google.com...pt3geVFtkc/edit?usp=sharin...
Kory Hoang (stably.io)