Sp500 - My system retains Bullish Environment posture.

Much has been written regarding the 50/200 moving average crossover on the SP500 in recent weeks. The 50/200 sma crossover produced a bearish signal in early July. Since that signal the SP500 has rallied strongly, there is nothing that unusual in this, the 50/200 crossover is a lagging indicator and it is not uncommon for adverse moves to occur after a signal. - The chart below shows the recent crossover; it is noteworthy that the SP500s rise has been constrained twice by the 200 day sma since breaking through it to the downside in May. Although my outlook for the SP500 is currently bullish, this bullishness will be tempered if the price fails to clearly break above the 200 day sma soon.

In relation to the 50/200 moving average crossover, I have looked back at its track record since 1970 (A generous 40 years worth of data). In that time it has produced 40 signals, 22 winners and 18 losers, in other words just over half the signals have been successful, not a particularly impressive performance. In terms of returns, its annualised return has been around 6.82%, which is better than a 'Buy and Hold' strategy during that time, though only just (I have calculated simple annualised return on Buy and Hold at 6.24%). The return also exceeds the return had an investor placed his money at the US 3 year Treasuries rate on a rolling annual basis (6.68% according to my calculations), though again only marginally better, and not great considering the amount of drawdown and uncertainty suffered during that time, relative to such a safe investment.

Further to this, for the past couple of years I have been monitoring my own system which I use to gauge whether we are in a Bullish or Bearish environment for the SP500.  The model is similar to the 50/200 in that it is a lagging indicator, however it differs in a number of ways. For a start it is a momentum indicator of the 50 day simple moving average. I then have a number of entry and exit rules for bullish or bearish signals, in addition a neutral signal can also be created. I do not use this system as a trading system, since like the 50/200, it is a lagging not forward looking indicator, and is therefore liable to significant adverse swings, which could seriously damage the wealth of a leveraged trader such as myself. However, I do use it to gauge the overall trend environment of the market, and will always be aware of the trending environment as indicated by my system. -  For the record, had I used it since 1970 as an investment tool, its performance would have been significantly superior to the 50/200 crossover method. It has generated 32 signals in that time 15 winning signals and 5 losing signals, a 75% success rate winners to losers (The remainder have been neutral signals, although they have been for shorter periods, just over 2 months on average.).  The annual average return would have been 8.48% (Though this does not include interest on balances during neutral periods, which would have slightly increased the return).

The last signal generated by my system was early July 2009 when it turned bullish. Throughout the past three months of negative price action it has remained in bullish mode, though being a lagging indicator it would anyway take its time to turn neutral or bearish. Despite being in bullish mode, it currently is in an oversold position, and moving lower, which highlights a risk of turning bearish, however the market would need to start turning seriously lower over the next week or two to generate a bear signal. Unless that occurs soon it will likely continue to signal a bullish environment.

The first set of charts below shows the SP500 over the past decade or so, with my indicator below. The coloured areas on the chart shows the nature of the environment (bullish/bearish/neutral) as indicated by the system.

The next chart shows the SP500 on a log-scale since 1970, with the coloured areas on the chart reflecting the nature of the environment (bullish/bearish/neutral) as indicated by the system.

Finally below is  a table showing some performance statistics for the system, compared to the 50/200 crossover method, 'Buy and Hold', and an investment at the 3 Year Treasury rate.