A Primer on the 200-Day Moving Average

There have been many false starts to this indicator -- particularly since Jan. 1, 2000, with 17 occurrences and only two successful. This includes the most recent occurrence, which opened April 21 and hasn't closed yet. So when someone says "we just crossed over the 200-day moving average so now we are in a bull market," it's best not to believe it.

Buy Above the 200-Day, Sell Below Only 28% of the trades in this test resulted in a positive outcome.

Source: James Altucher

Click here to see larger image.

Test B: Buy the S&P when the close crosses the 200-day moving average, and sell one day later. The idea here is: Maybe people get so excited about the event of the crossing that they rush to buy.

Result: Mildly positive, but not statistically significant and does not beat commissions and slippage. Of the 147 occurrences (not 142 like before?) since 1950, 74 were successful and 73 were unsuccessful, with an average return of 0.11% -- equivalent to 1 point in the S&P today.

However, the results get a little better when you buy the 200-day crossover and hold for one month. Under these circumstances, you have a 72% success rate with an average gain of 1.65% as opposed to the 0.68% average monthly return since 1950. The last trade in this system started on April 17 and ended on May 16, for a gain of 5.68%.

So perhaps it is bullish when the S&P 500 crosses its 200-day moving average and you hold for a month. Basically, you get double the return per trade of random buy-and-holding for a month.

Holding for a quarter doesn't improve the results: You would get 2.67% per trade as opposed to an average quarterly return of 2.04% since 1950.

Test C: What happens now if you run the "one-month" system described in test B on a basket of your favorite stocks? Buy a stock when it crosses its 200-day moving average, and sell one month later.

I ran the test on the stocks in the S&P 400 mid-cap index over the past eight years. I ran it as a simulation where each trade took up 1% of equity and tabulated the results. Results were marginal: an average return of 0.62% per trade with the following yearly returns demonstrating that you would've survived the worst of the bear market but still taken a big hit in 2002.

S&P 400 Mini-Cap Index Buying a stock when it crosses the 200-day and selling a month later offers marginal results.

Source: James Altucher

In general, although conceptually it does seem bullish when the indices cross their 200-day moving averages, it does not seem like there is a worthwhile trading strategy that results. Tests A, B and C bore little fruit.