Market timing using the S&P 500

This is a simple, easy to follow and execute, market timing approach using the S&P 500 index. It involves tracking two exponential moving averages: the 10-week and 50-week. (What is a moving average? It is the average of a stock's closing prices over a specified number of market days. For instance, the 10-day moving average would be the average of the last 10 days closing prices.)

The Plan

This is how it works, when the 10-week moving average of the S&P 500 index is above the 50-week moving average, you remain invested in the stock market. (One simple way to invest in the entire market is to buy the SPY, which tracks the S&P 500.) When the 10-week moving average drops below the 50-week moving average, you move your investments out of the stock market (i.e. you sell the SPY) and into cash (i.e. a money market fund in your investment account). This is how it looks over the last 3 years (see here).

Historical proof

If you had followed this plan from 2003 through 2007, you would have gone LONG (i.e. the 10-week is ABOVE the 50-week) on May 15, 2003, then waited until December 21, 2007 to go back into CASH. Only two signals in six years, so this is not high maintenance. Yet you would have remained in the uptrend throughout most of the move, and averted the horrendous downtrend which began in 2008.

If you had followed this plan from 1995 through 2000 (a six-year bull run), you would again have gotten only two signals, and would have remained entirely long for an amazing climb. The sell signal toward the end of 2000 would have kept you from a disastrous downtrend from November 2000 through May 2003-a two-and-a-half year period!

Execution

So how to implement this plan? You simply watch on a daily (or weekly) basis the following link: SP500chart. Similar ones can be obtained from other websites like Yahoo Finance (see here), etc. Once you see the 10-week moving average cross ABOVE the 50-week you are back in the stock market. Whenever the 10-week drops BELOW the 50-week, you are back in CASH. Simple as that.

For a more elaborate description of this technique (published in February 2008) go here.