A Defensive Strategy That Works

The chart also shows that, in addition to being less volatile than the S&P 500, BXM has outperformed SPX by 12% since SPX went below its 200-day moving average for good in late December.

The bigger picture logic behind the concept is that the stock market has an average annual return of close to 10% over very long periods. That approximate 10% includes all of the bear markets, crashes and busts that have occurred. By going down less during the bear phase of a normal stock-market cycle, as BXM (and its ETF proxy PBP) has done, that average 10% has a chance to go up when looked at over an entire stock-market cycle.

Compound this concept over several full stock-market cycles and there is the chance to be significantly ahead of the S&P 500.

There is an assumption that the buy write index will continue to function as it has. That something could change seems unlikely, but the current financial crisis should have taught us that many things we have taken for granted previously should no longer be taken for granted.

One obvious question is why not get completely out of the market when the S&P 500 goes below its 200-day moving average? For some people, this may be appropriate but zero exposure to the stock market is a big bet. Markets can turn up quickly and not give much of a chance to get in. The simplified example of switching from IVV to PBP as outlined above means not having to be correct about whether a move higher is the big one or just a fake-out. If the market goes up 20%, being in PBP would produce a lagging result. Not being in at all would produce no return. Lagging is much better than missing a big move up.