Timing is everything

Last week we showed readers how investors would have fared had they followed the well-known Wall Street adage “Sell in May and Go Away” (for those who haven’t read it, click here). This week we have another relatively simple-to-execute strategy for you.

Many people have asked us over the years what funds they should invest in within their 401K or similar tax-advantaged retirement savings plans. Many employer-sponsored plans have a relatively limited number of investment choices available to select from. Furthermore, with diversification through index fund investing having been the financial advisor mantra for years (along with the standard 1-3% annual management fee to…well, support their sales efforts to score even more assets under management), investors get conveniently blended and watered-down funds that often don’t yield consistent returns nor protect them from periods of market volatility. There are basic strategies that may help the average investor outperform the market averages even with the most restrictive 401K programs.

Here’s one to consider (in absence of a catchy name, we’ll call this strategy the “Ultra Simple Moving Average Strategy”):

  • Switch to (buy) the S&P 500 index when the closing price is above the 264-day simple moving average (264 SMA) and the lowest price that day was 1% below the 16-day simple moving average (16 SMA).
  • Switch from (sell) the S&P 500 index to (buy) a placid fixed income bond fund (with a consistent 2+% annual return over the last 10 years) if the lowest price that day crossed below the 264-day simple moving average (264 SMA).
  • Switch from (sell) the S&P 500 index to (buy) the fixed income bond fund if the highest price that day was 8% (or more) above the 16-day simple moving average (16 SMA).

Here are the results:

20200522_ultra_simple_strategy

20200522_ultra_simple_strategy_perf_graph

By switching to the bond fund when the S&P 500 dips below the longer-term SMA, you avoid a significant part of market selloffs (which are often aggressive) and take profits when the S&P gets “toppy” (overbought). And with the overall greater returns, you also get significantly less drawdown (-19% vs -56%) and are out of the market (in bonds) 30% of the time.

If you have the option to invest in a leveraged, double (2X) long ETF (ProShares Ultra S&P 500, symbol: SSO) rather than an S&P 500 index fund or ETF (symbol: SPY), the total return increases from $534,700 (shown above) to a whopping $1,758,200 (not shown)! Your drawdown would then be closer to buy-and-hold (still only -39% vs -56%), but your return would be 229% higher!

Assuming you’re making regular contributions to your 401K, we also suggest that you try to modify the timing of your contributions to occur (ideally) when you are out of the S&P 500 and in the bond fund; however, this may be tricky if there’s an extended bullish period of time (as was the case 1997-1999, 2013-2014 and most of 2019).

Market volatility is likely here through the summer, the election cycle and will inevitably occur randomly for years to come. 5%, 10% and even 50% moves up and down are what traders (an increasing number of which are quantitative hedge funds) have become largely dependent on to drive big returns. For the average retail investor, there are alternatives to sloshing around in that great big turbulent sea while still achieving good returns. Both the “Sell in May and Go Away” strategy that we presented last week and the “Ultra Simple Moving Average Strategy” described here are both ways to get better returns with less drawdown.

Forte Strategy Update

Here’s a quick update of the Forte Strategy trading activities for the week. The oil and equity markets remained at elevated levels of volatility for the week which left these trading models inactive. However, the volatility levels are steadily declining and are approaching a level within the range for trading. If these markets continue to quiet down, a trade is possible as early as next week. We did execute one round-trip trade in the gold market which netted a small gain of 0.2% for the week which reduced the loss for May to 0.1%. Our full year net results so far equal a 1.3% loss compared to a 8.5% year-to-date loss for the S&P 500.

More details about our trading activity can be found by registering on the Collective2 website and searching for Forte Strategy. A running list of these email blogs and general information about Maestro Capital Research can be found at maestrocapitalresearch.com.

Market Update

20200522_sp500_chart

  • The 200-day simple moving average (200 SMA) is still holding as resistance which the 20 and 50 SMAs resting below as support (bearish), however…
  • 61.8% Fibonacci retracement level now appears to be serving as support, so it’s possible that we see the S&P 500 run up to the 76.4% retracement level of 3100 (bullish).
  • Uptrend momentum continues to decline (note PFE) similar to what occurred from Dec to Feb (bearish).
  • The fifth Elliott wave appears to have extended to 2976 on Tues (bearish).

20200522_memorial_day

To our men and women in uniform, past, present and future, Maestro Capital Research would like to say “thank you” for your service and sacrifice.

Please continue to stay safe and healthy.

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