The Trend is Your Friend

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John Hussman’s recent market commentary, The Trend is Your Fickle Friend, highlighted the limitations of trend-following investment strategies that rely on moving-average crossover rules as a primary filter.  But an extensive study conducted by our firm demonstrated that a simple moving-average crossover system outperforms buy-and-hold, while reducing drawdown risk and volatility.

Hussman is not a fan of this approach, and he cites studies that (correctly) highlight two important drawbacks of tactical strategies based on moving averages.  First is the risk of being “whipsawed” by counter-productive trading.   In a choppy, trendless market environment, moving-average crossover strategies sometimes buy into rallies just before those rallies fail, or sell into corrections that promptly reverse and turn higher. 

The recent market environment of policy-driven swings in market sentiment between risk-on and risk-off is a perfect example of the whipsaw hazard, which leads to the second drawback of these strategies – tracking error.  Moving-average strategies can produce very wide gaps in relative performance, as compared to buy-and-hold benchmarks, over time periods as short as one to five years.

In the end, Hussman concludes, “Typically, the best that can be achieved with popular moving-average crossover systems is a moderate reduction in drawdown risk, but zero or negative incremental long-term return versus buy-and-hold.”

While there is a case to be made for Hussman’s point of view, I have a deep conviction that moving-average crossover strategies work, and it’s based on extensive research conducted by analysts at my firm, Capital Advisors, Inc.  Our work in this area suggests that simple moving-average strategies can deliver substantial benefits for investors in the areas of diversification and risk management. 

Such strategies can be particularly effective in addressing three important challenges in portfolio management:

  1. Reducing drawdown risk
  2. Narrowing the range of expected outcomes over rolling forecast periods of three to five years
  3. Reducing the frequency of negative returns over rolling periods of three to five years

For investors who follow goals-based planning strategies built around absolute, rather than relative, return objectives, moving-average strategies offer a new approach to diversification and risk management when used as a complement to more traditional, buy-and-hold allocations.

Study methodology

The remainder of this article presents data from an extensive study we at Capital Advisors conducted of every country-specific equity market index tracked by MSCI with at least 40 years of history – 18 different indexes in all.  The study measured numerous characteristics for each country index, using a tactical strategy driven by a moving-average crossover signal. 

Data for this study was obtained from MSCI.  It is not possible to invest directly in any of the strategies presented here.  Transaction costs and taxes would reduce the annualized return of the tactical strategy if executed with real capital.

At each month-end during the study period, the price of the market index was compared to its trailing six-month moving average.  If the current price of the index was above its moving average, we assumed that the tactical strategy held the market index for the subsequent one-month period.  When the index closed below its moving average at the end of a month, the tactical strategy switched to the BarCap Aggregate Bond Index for the subsequent one-month period.  This binary trading rule was applied monthly throughout the 41-year study period, between January 1971 and December 2011.  

For example, the data below show that the tactical strategy reduced substantially the maximum drawdown risk as compared to the analogous buy-and-hold index over rolling three-year and five-year holding periods (measured as of each month-end).  There were no exceptions to this finding among the 18 countries included in the 41-year study.

Hypothetical Back-Test Study
Maximum Drawdown
1971 - 2011


Rolling 36-Months

Rolling 60-Months



Buy & Hold


 Buy & Hold




































Hong Kong













































United Kingdom





United States