The SPY and Its 200-Day Moving Average, Revisited

Why owning the SPDR S&P 500 ETF Trust (ETF) when its below the 200-day moving average isn't a great idea

Oct 24, 2014 at 9:02 AM
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Ready for another flashback?

All the way back on Oct. 13, the SPDR S&P 500 ETF Trust (SPY) closed below the 200-day moving average for the first time in nearly two years. As we showed a few days later, owning SPY when it's below the 200-day wasn't the greatest idea in the world. But, it was a "bad" trade in a rather odd way.

The SPY has dipped below the 200-day 73 times since its invention in 1993, and if you bought on the first close below the 200-day, and then sold on the first close after, you made a winning trade 67 out of 73 times. But, over the course of time, you missed most of the SPY gains over the last 21 years, thanks to the fact that three of those six losses were disasters.

Well, we can now add a 74th round trip to our database. The SPY closed back above the 200-day on Tuesday. The system would have triggered a buy on the Oct. 13 close of 187.41, and then a sale on the Oct. 21 close of 194.07, for a nice tidy 3.55% profit.

That's actually the best trade in this system since a trade was initiated on Sept. 23, 1999!

But, I really wouldn't recommend this at home. Part of the nice return is thanks to circumstance. The SPY closed at 190.54 on Oct. 19, a mere 0.02 above the 200-day, and then it tanked the next day, giving you a much better entry. Then, on the way back up, SPY closed at 190.30 on Oct. 20, vs. 190.64 on the 200-day. The next day produced a big rally to 194.07, which is our exit point. So, a few pennies either way and you would have had a near-scratch trade, as you could have entered and exited in the 190.5 to 191 range.

In the real world, you shouldn't use any sort of system that's so rigid. It's interesting and informative to look at the history, but there are so many moving parts around each instance that it's never right to stick perfectly to any of these.

The lesson that we learned a couple weeks ago still holds true. A very long run above the 200-day doesn't tend to immediately morph into a disastrous fall under the 200-day. By the time we've gotten back below the 200-day, we've seen most of the damage.

The quickest boom-to-bust turn was in 2008, and even then, you had a few months to get out before the real bear took hold. And let's face it: The 2008 experience is still fresh enough in everyone's memory to color our impression of every shakeout.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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