Most Popular ArticlesHoly Grail or Fairy Tale?
Theodore,
Thank you very much for the interesting commentary and analysis on the Moving Average. I have been studying this the past few weeks and am very intrigued by it.
You may be covering this in Part 2, but I am curious as to your opinion on how this applies to the current market environment. Does the increased volatility and speed at which the markets digest and apply information (or overreact!!) impact this analysis and its use going forward?
Look forward to Part 2!
Thanks
Matthew W. Tackman
Financial Advisor
The McDonald Group
Merrill Lynch & Co.
Ridgefield, CT
Ted Wong replies:
Matthew,
You have raised an important question: can any investment system adjust to the rapid and dramatic changes we experience currently? I have seen many so-called infallible technical indicators suddenly stop working. But the MAC system possesses several rather unique qualities that enable it to remain effective going forward.
First, it has worked over a very long time - for over a century. It has witnessed the Industrial Revolution, two world wars, the creation of silicon wafers and the resultant microelectronic wonders, the Information Age, and the Internet Era. So I have confidence that MAC can handle the recent global systemic collapse and beyond. No other indicators or systems have such a long history of data showing that their effectiveness over time can be validated.
More importantly, MAC is a single-variable system, i.e. the length of the MA is the only thing you can tweak. You can't over-optimize MAC. In fact, curve-fitting is what kills most trading systems because once they leave the laboratory, they quickly stop working in real life.
Lastly, MAC is price-based. It does not depend on other secondary parameters such as interest rates or inflation numbers to trigger buy/sell signals. As such, it's inherently more robust.
As long as the markets show trending direction, no matter how weak, the MAC system will put you on the right side of trades. You don't predict or second guess the markets, you just follow.
Hope this helps!
Ted
Ted,
I enjoyed reading your recent articles in Advisor Perspectives (What the "Missing Out" Argument Misses and Moving Average: Holy Grail or Fairy Tale). I have never been a believer in the "buy and hold" fallacy and I appreciate the fact that you are trying to educate people about the misconceptions of this strategy.
I have been meaning to run some analysis of my own on the S&P data set (e.g., inflation adjusted returns and rolling 5, 10, 15, 20, 25, and 30 year returns). I have monthly S&P data from 1871-2009 that Professor Shiller was kind enough to post on his website. The data set also includes TTM dividends on a monthly basis.
After scrubbing this data set, I have two main questions that I would love to hear your thoughts on:
- Why do you think Shiller is using average daily closing prices for the month-end index value (as opposed to just using the month-end closing price)? For example, for month-end 12/31/08, he uses the average daily closing price of 877.56 vs. the actual month-end closing price of 903.25.
- In your opinion, what is the most accurate way to calculate the total return (assuming dividend reinvestment) using the data I have (monthly index values and monthly TTM dividends)?
Also, if you wouldn't mind sharing the data set that you used for your analysis I would love to take a look at it.
Thanks in advance for your help,
Anonymous
Ted Wong replies:
Thanks for your feedback.
First, I used the same database in Part 1 from Prof Shiller, as referenced in my "Missing out" article. I have the same questions that you have regarding the way Shiller calculates the index and don't have good answers either. I'm afraid that you may have to ask the Professor yourself.
As far as which way is more accurate, I believe that if the duration is long (138 years), then any difference would be negligible because any non-compounded factors would be evened out. A shorter time frame, such as a year or so, would be a different story.
Good luck!
Ted
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