Grail Investing

It is fairly simple to test this thesis that “moving averages no longer work since 1990″. Below is a chart of the S&P500 total return vs a timing system that uses the simple 50/200 day SMA crossover mentioned in the article. The portfolio moves into a Vanguard Bond mutual fund when not on a buy signal. Transaction costs and taxes are ignored.

As you can see, the conclusions the professor has made are somewhat curious.  It looks like timing improves every metric from CAGR [compound annual growth rate] to vol and maximum drawdown reduction.  It also looks like the timing model did an impressive job of sidestepping two devastating bear markets and the psychological damage that causes.
– Mebane Faber

Blake LeBaron, a finance professor at Brandeis University is the one who apparently came to the conclusion that moving averages haven’t worked since 1990. However, as Mark Twain supposedly said, “It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.”

I doubt that Mark Twain actually said all the things he’s credited with saying, but it’s one of my favorite quotes anyway. It’s amazing how much I read and hear about the markets that’s very simple to verify if people would just go to the trouble to do it.

RSI Reversal

The portfolio is about 30% invested. But, as you know, this strategy can go from 0% invested to 100% and back to 0% in a matter of days.

I may — emphasis on may – be through tweaking this strategy for awhile. I kind of like what it’s doing.
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