Testing the SOTM: The Sleepy Trend-Follower
Unfamiliar with the State of the Market report? The SOTM is a free daily snapshot of what some of the simple strategies we’ve talked about on this blog are saying about the market right now.
SOTM users know that we’ve stopped reporting a single next-day prediction. We now break the prediction down into three timeframes: the short, intermediate, and long-term, because there really is no one-size-fits-all answer. Different investors would find very different uses for the same report.
To illustrate, in the next two posts I’m going to test how two diametrically-opposed investors would have fared over the last couple of years using the SOTM to trade the S&P 500: the sleepy trend-follower vs the aggressive swing trader.
In this first test I’ve assumed a trader only followed the SOTM’s long-term prediction, allocating the same % of his portfolio to the S&P 500 as indicated in the report. He’s completely ignoring the short and intermediate-term predictions.
Because our friend is particularly sleepy, he waited an entire day to execute each day’s signal, and instead executed at the following day’s close (i.e. there’s a full one day lag in execution). And he never used leverage, lest he be up all night tossing and turning.
I’ve ignored transaction costs and slippage because these results could have easily been reproduced with actively-traded mutual funds (our weapon of choice).
And for the number lovers…
Like any good trend-follower should, our sleepy friend sidestepped the entire 2008-09 bear, and captured a healthy portion of 2009 gains. He didn’t get rich along the way, but he also didn’t work that hard either – he spent a couple of minutes a day placing his trades at any point after the close.
Note: this is a very short test for such a long-term strategy. The point of this post isn’t to say “wow, look how great that backtest is”. The point is to show how the SOTM might mean different things to different investors. I’d encourage readers to dig deeper into the expanded tests we perform when we introduced each individual strategy (links available from the State of the Market report).
In our next post, I’ll look at how an aggressive swing-trader would have fared using the exact same report, but incorporating the short and intermediate-term predictions.
. . . . .
Filed under: State of the Market Report, Trading Strategies | 6 Comments