Hopefully you learned from my previous post that a relentless bull market can cause bloggers who are tired of making money or are not making money (for whatever reason) to begin calling tops. Actually, I didn’t write that in that post, but I think there may be some truth to it. Luckily, I am not in either of those camps.
But what else do I write about during a raging bull market except a possible top?
Exactly.
So here we go. When we start to examine markets to try and gauge when exhaustion might begin, one of the ways I like the most is to count the number of days above a major moving average and then use that as a buy setup. It is very simple, easily re-created, and there are usually plenty of samples with which to work.
With that in mind…
The Rules:
- Buy $SPY or $SPX at the close when it has closed 77 days above its 200 day moving average.
- Sell X days later at the close.
- All $SPY history (~20 years) and all $SPX history (~80 years) used.
- No commissions or slippage included.
The Results:
The results surprised me. Even though I have become inured to backtests that almost always show an upward bias, I was really expecting these results to show some increasing volatility, at the very least.
And I can’t even use sample size as a limiting factor for this study. The results are bullish and I feel comfortable saying so.
Some stats:
- SPY Samples: 898 occurrences with 41 held for the full 50 days
- $SPX Samples: 4011 occurrences with 187 held for the full 50 days
- $SPX Percentage of Winning Trades: 62.36%
- $SPX Average Winning Trade: 6.13%
- $SPX Average Losing Trade: -6.50%
At this point in the market history, with $SPX 77 days above its 200 day moving average, the market was higher 50 days later every 2 out of 3 trades. And on the downside, the losing trades were not very large relative to the winning trades.
Finally, lets take a look at the equity curve generated using $SPX:
The system occasionally catches huge winning trades: 1950-1960, 1980-1990, and 1990-2000.
Let’s look at the drawdowns:
The setup has been in a fairly significant drawdown since 2010. There has only been one other instance during the 1940s where the drawdown got worse. Should we expect that the current trade may be the one that begins erasing the drawdown rather than increasing it? If that is the case, this bull has much farther to run.