John Hussman of Hussman funds on trends, averages, technicians  and much more.

One of the questions we often receive is why we don’t simply lift our hedges when the market advances above some moving average or another, and replace them when the market breaks below those moving averages. Certainly, when one looks a chart, extended market advances always break above various moving averages, and extended market declines always break below various moving averages, so simple trend-following strategies seem utterly self-evident. Unfortunately, if you actually take that strategy to historical data, the results typically aren’t nearly as compelling. Moreover, once any amount of slippage or transaction costs are taken into account, the most widely-followed strategies generally underperform a passive buy-and-hold strategy over time, and often don’t even manage downside risk particularly well.

The charts below feature a variety of moving-average crossover strategies using the S&P 500. The darker blue line tracks the total return of the S&P 500, and the others track a variety of strategies that are long when the S&P 500 index is above the given moving average, and in T-bills otherwise (the moving averages are exponential – giving a weight of 2/(N+1) to the most recent observation, and the rest to the prior value of the MA, where N is the length of the MA). The moving average lengths are Fibonacci numbers, which is a common practice among technicians.

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