The Stories of Moving Averages’ Demise are Greatly Exaggerated


This is a response to Blake LeBaron, a finance professor at Brandeis University, who speculates that since 1990 something has permanently changed in the financial markets that has made moving averages mostly ineffective (read more and more).

In this post I’ll to show that, in the case of the U.S. stock market, not only is LeBaron wrong, he’s standing diametrically opposed to the facts: moving average crossovers have been more effective over the last decade than at any point in the last 80+ years.

[logarithmically-scaled, growth of $10,000]

Recall the graph above from my post testing the most venerable of moving average crossover strategies, the Golden Cross.

In red I’ve assumed an investor went long the S&P 500 at today’s close when the 50-day simple moving average closed above the 200-day, otherwise to cash, from 1930. For comparison I’ve also included buy & hold in grey.

See end of post for assumptions about dividends, return on cash, and trade frictions.

Recall too that the benefit of long-term crossover strategies like this one has never been generating returns; it has been improving risk-adjusted returns and managing drawdowns. So any discussion about the effectiveness of crossover strategies has to focus on those two metrics.

In the graph above I’ve shown the rolling 10-year “volatility-adjusted return” of the Golden Cross (red) versus buy & hold (grey). By vol-adjusted return I mean annualized return divided by annualized volatility (like a Sharpe Ratio without the risk-free discount).

A higher number would indicate that the strategy performed better on a risk-adjusted basis. The graph shows that the Golden Cross has consistently either matched or outperformed buy & hold.

By how much?

In the following graph I’ve shown the difference between the two lines (i.e. subtracted the grey line from the red line). Positive numbers indicate that the Golden Cross outperformed buy & hold.

In terms of excess vol-adjusted returns, since at least 1930 the Golden Cross has never done a better job trouncing the market than it has in the last 10+ years.

The bear markets of 2000-02 and 2008-09 gave long-term MA strategies a unique opportunity to shine, and at least in the case of the U.S. stock market, the stories about the demise of these strategies have been greatly exaggerated.

For me and my money, I’m still a proponent of more active short-term strategies, but for now, long-term moving average crossovers still remain a significant improvement over straight buy & hold.

Happy Trading,

P.S. for brevity I didn’t show it, but the same conclusion holds when looking at drawdowns (the other benefit of long-term moving average strategies like this one).

Test assumptions: (a) I’ve calculated the moving averages using the S&P 500 cash index (which traders generally use), but calculated returns based on daily dividend-adjusted data (dividends interpolated from quarterly data), (b) results are frictionless (i.e. do not account for transaction costs/slippage) but could be closely reproduced in today’s market using mutual funds less part of an annual expense ratio, and (c) I’ve assumed a return on cash of half the nearest 13-week Treasury.

. . . . .

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14 Responses to “The Stories of Moving Averages’ Demise are Greatly Exaggerated”

  1. 1 jg

    I emailed you a spreadsheet after posting a reply to your recent golden cross blog. My basic testing shows that if you only sell when both the 50MA AND 200MA have a negative slope (using the last 20 days of the averages) the MA strategy has much better returns. I backtested back to Jan 1961 when the S&P500 was ~58, and with Buy/Hold you would have a ~$1035 gain vs a gain of ~$1704 if you use the enhanced strategy (~65% better). The enhanced strategy would have only 31 trades with none of them being negative, and the maximum you would have been down from the buy point is -7.7% (not sure if this is drawdown or not?).

    If you used that standard death/golden cross your gain would be ~1479 with 52 trades (4 being negative). I’d love to have someone verify this as these results seem quite impressive. I have an updated version of the spreadsheet if anyone is interested, but I’m guessing your testing SW is much more advanced.


    • 2 MarketSci

      RE to jg: I received your spreadsheet. Thanks for that. It’s on my very long to-do list and I’ll definitely get back to you w/ comments. michael

    • 3 Morgan

      jg – I would be interested in seeing your spreadsheet. I’m interested in learning more about using Excel to test simple trading strategies, and I’d prefer to find something like your system that doesn’t usually trade more then once a week, so it doesn’t have high transaction/time costs. If you are willing to share, please forward the spreadsheet to killhotrod@hotmail.comm (remove the last “m” I added to prevent spam bots from grabbing my email address).

      • Hi JG – I loved reading about your results! Please share your excel sheet with me as well please… I have hired an intern to do some other momentum testing (what other signals can complement) and will share my results when available. Maybe you have found the answer! Please forward to fgrisdale AT – Many thanks. I hope I am indebted to you big time. FG

  2. 5 jg

    OK, hadn’t gotten an email back so wasn’t sure you were interested. I just emailed you the latest spreadsheet which has lot’s of changes compared to the first. The results above assume no transactions costs, and zero return on cash. Also using a 59/179 day moving averages and 19 days to determine the slopes yields a return of $1813 (75% better than buy/hold, and an additional 10% better than the enhanced 50/200). These moving averages are close to the optimal ones from your recent post that compared a bunch of different moving averages.


  3. Would you please provide a link to the original research paper by Baron?

    The only one I can find is from 2000 at SSRN



  1. 1 The Death Cross, or, Questioning What You Read – World Beta – Engineering Targeted Returns and Risk
  2. 2 Death Cross Debates :: Top Gun Financial Planning
  3. 3 Dear Mr Eugene Fama, are you just blind?... | Au.Tra.Sy blog - Automated trading System
  4. 4 The Magic of the Moving Average, Part 2 : Wealthcop Public :

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