From the February 01, 2010 issue of Futures Magazine • Subscribe!

S&P 500 data: Three ways to profit

Finally, our third model is the one year indicator based upon a simple philosophy. If current price is better than one year ago, the market is improving and we want to be long. If the S&P is lower than one year ago, the market is declining and we want to be short. Again, we use a three-week average of the difference to try to eliminate any chatter and apply the same filters as in the previous two models and start on the same date. This model also had 12 winners, but only traded 19 times including an open profit of 34.47 points; 63.15% winning trades. The gross gain was 2,156.73 points and the net after slippage is 2,151.03. Notice that this exceeds the ideal hypothetical of 1,968, so we conclude this is a resounding success. The best gain was a long on Feb. 10, 1995, closed on Nov. 10, 2000 for a gain of 883.54 points. The average trade gained a resounding 113.21 points.

In the 105-week model, only three of the 28 trades (11%) had gains exceeding 100 points, including the open trade. In the one-year indicator, six of the 17 trades (35%) exceeded 100 points, including the current gain. Eight of the 80 simple moving average trades (10%) exceeded 100-point gains. On the losing side, the 52-week average had four losses in excess of 100 points. Neither the longer-term average (worst loss: 92 points), nor the one-year indicator (worst loss: 43 points) suffered a 100-point loss on a closed trade (see “Long-term Titan”).

The ideal trade is to have bought at the bottom and sold short at the top, always good advice in any market, because you only need to stop by to trade twice in a lifetime. That’s good work if you can swing it. That said, our models indicate the following:

a) Trading less may be better,

b) The longer-term exponential moving average is inferior to the shorter-term simple moving average,

c) The one-year indicator is significantly superior to both moving averages,

d) The one-year indicator is better than the ideal trade and may be of significant assistance to the position trader

An investor or a long-term trader can certainly benefit from these tips. Interestingly, most of the money from all of these systems was made on the long side. The best short trade in the one-year system started in 2000 and ended in 2003.

The stock investor could simply move to cash when the one-year strategy signals a sell or reduce long exposure by some measure, such as switching to defensive positions. The commodity trader or the more aggressive stock investor could put on short positions in the S&P 500 futures market.

It must be pointed out that this was a rudimentary treatment of the indicators. A trader possibly could improve his performance by adding other filters or trailing stops or profit targets. None of this was done for this analysis to keep the comparisons between the systems free of non-strategy-based interference.

Short-term traders also can benefit from this knowledge. A day-trader should test a 30-day indicator — today’s price vs. the price 30 calendar days prior. A five-minute trader could look at the current bar compared to the same bar on the prior day — or one 60 minutes or 120 minutes earlier. While the actual strategy may not necessarily hold up on these untested time frames, what most likely will is the tenet that success doesn’t have to happen overnight.

Arthur M. Field has a Ph.D. in management science from Clemson and a J.D. degree from Rutgers. He is a former commodity broker and was co-director of Fidelity’s Pacific Fund and an in-house commodity fund. He wrote “Mastering the Business Cycle and the Markets.”

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