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Imagine a market strategy that did 11 times better than buy and hold and never experienced a down year. With perfect market timing, that’s as good as it gets. Traders that avoided every losing year in the stock market since 1970 would have made 11 times more money than buy-and-hold investors. A “perfect timing” trading system would have returned about 15.9% a year while the buy-and-hold investor would have gained about 9.5% a year including dividends.
In this case, a moving average has been added to the ROC indicator to help time the sell. This system alone can have false signals and additional filters should be applied to this strategy to develop an effective trading system.ROC can be used to create a market-beating trading strategy. Using this powerful idea, we are now watching the stock market from the sidelines. The S&P 500 has been on a sell signal since March, which means we have been able to find better investment opportunities than the U.S. stock market. The index fell as much as 15% after the sell signal was given and over the last nine months of 2011, the S&P 500 was flat.
ROC for the S&P 500 is negative and that indicates the risk of owning stocks is high. The indicator has also been below its moving average for most of 2011.The signals from the 6-month ROC system will not be perfect and there will be losing trades. But since the beginning of 2007, the 6-month ROC system has delivered an annual return of about 14.7% a year, very close to the long-term record of perfect timing which gained 15.9% a year. With this system, we buy the three ETFs that have the highest ROC over the past six months.Right now, my 6-month ROC strategy says that traders should be holding iShares Lehman 7-10 Year Treasury (IEF), iShares Barclays 20+ Year Treasury Bonds (TLT), and iShares iBoxx Investment Grade Corporate Bonds (LQD).
Many investors hold strong opinions about the 200-day MA... but is it actually important?