Buy and Hold Versus Timing Strategies: The Winner Is …

Abstract

The authors propose three simple market-timing strategies and compare them to other commonly known strategies, such as the yield curve, earnings yield vs. Treasury yield, Shiller CAPE, and S&P 500 200-day simple moving average. The first strategy uses the leading economic indicator (LEI) from the Conference Board. The other two use sentiment indexes from the Baker-Wurger index and the Feldman perceived loss index to trigger the switch between the S&P 500 and three-month Treasury bills. The Conference Board’s LEI strategy earns the highest return of the three strategies, beating the benchmark strategy, which consists of simply holding the S&P 500, by 1.66% per year from 1970 to 2012. Corresponding monthly returns are significantly different from those of the benchmark strategy at the 10% level. The authors also combine strategies and find that a mix of both fundamental and technical strategies produces even greater returns than does any single market timing strategy. The combination of the Conference Board LEI and S&P 500 200-day moving average beats the benchmark strategy by 2.76% annually. Lastly, they find that the Shiller CAPE underperforms all of the market-timing strategies in question, as well as the S&P 500 benchmark strategy.

TOPICS: Portfolio theory, statistical methods