Simple Indicator YTD Review: Generals Lead the Troops
This is a multi-part series looking at how some of the simple indicators we’ve talked about in the past fared through this very interesting trading year.
In this post we look at the Generals Lead the Troops strategy (aka large vs small-cap performance). This strategy has been effective using multiple lookback periods, but for this test I’ll use the same parameters I used when I first introduced the strategy: go long the S&P 500 at today’s close if the S&P 500 has outperformed the Russell 2000 over the previous year and to cash if it has underperformed.
As previously mentioned, all tests are frictionless and account for a return on cash of half the nearest 13-week Treasury bill.
Readers know that, generally speaking, I’m not a fan of using trend-following strategies for anything other than setting the long/short bias of more active short-term strategies.
But as far as trend-followers go I like this one as a companion to something like the Golden Cross because (by its nature) it often takes positions that might not match where the trend appears to be today.
The strategy caught a good bit of the drawdown in 2007-08 before moving to cash for most of 2009. Unfortunately, like we saw with the Golden Cross in the previous test, it missed most of the 2009 recovery, but because of a nice call on the market bottom this year it has still solidly outperformed the broader market.
At this moment the S&P 500 has underperformed the Russell 2000 over the previous year (+29% vs +34%), so this strategy is currently in cash.
[Edit: click to read the rest of the YTD Review]
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