SMI S&P500

In this first test we will apply the Single Momentum Strategy on the S&P500. We use the adjusted closing prices of S&P500 starting from 1927 until october 2020. The interval used in this test is 175 market days.

This means every day we determine the reference price as the closing price175 market days earlier. If the closing price of the previous day is the same or higher than the reference price, we stay in the ETF tracking the index or we buy it; if the closing price of the previous day is lower than the reference price, we sell the ETF or stay in cash.

Summary of the strategy

  • Single Momentum
  • Underlying ETF:  S&P500
  • Interval: 175 days

Results

Results of the Single Momentum Investing strategy applied on the S&P500

Analysis

The graph shows the results of the strategy (blue line) combined with the evolution of the S&P500 index (red line). Green dots indicate buy points; red dots indicate sell points.

We see over this very long period of time, the strategy outperforms the underlying ETF. In the table we see the return (CAGR: combined average growth rate) of the SMI175 strategy, which is 6,42%, and of the underlying ETF, which is 5,69%. 

The table shows the maximum breakdown as well. The maximum breakdown for this strategy over this long period of time (including the bear market starting in 1929) is 53,25%, which is high but significantly lower than the maximum breakdown for the underlying index (86,19%).

When starting with a portfolio of 100 $ in 1927, the value of this portfolio using this ‘SMI S&P500 int175’ strategy would be $30 805. A ‘buy-and-hold strategy’ would end with a portfolio value of $16 257. So the total return over these 93 years is 89% higher with the strategy compared to the underlying index. This big difference of the total return (89%) is a nice illustration of the power of compound returns and the importance of even small differences in yearly returns (0.73% in CAGR) over long periods of time.

History

The maximum breakdownperiod of the S&P500 occurred between september 16, 1929 and june 1,1932. 

The bear market, starting in september 1929, followed the roaring twenties, a decad of economic growth and widespread prosperity. It was the biggest financial disaster in history. Economies all over the world needed several years to recover.

Reading

An excellent report of the thrilling events in this dark period, can be read in this book:

‘The day the bubble burst’ by Gordan Thomas and Max Morgan-Witts, 1979.

Our story is not finished!

In part 2 we extend the analysis and calculate the effect of transaction costs, the days invested and the number of transactions over time. And we will find out whether it is necessary to check our investments daily.

SMI S&P500 part 2