mojoDallas (< 20)

Simple Voodoo (Make 50% Versus Lose 15% in 2008-2010)

December 05, 2010 – Comments (3) | RELATED TICKERS: ^DJI , ^GSPC , ^IXIC

I am back looking at technical indicators (Voodoo Stock Picking) as part of an overall shift in my investment strategy.  So, I thought I would start with the simplest of indicators and see what the impact of using this would be versus just buy and hold.  The indicator I chose was to buy into an index fund when the Close Price crossed above it's Exponential Moving Average EMA of 45 days and short the index fund when it the Close Price crossed below the EMA(45).

I chose to do my study with four major indexes (Dow Jones Industrial Average, S&P 500, Russell 3000 and NASDAQ 300) and over the last 3 years (a lot of big ups and big downs).  The results were somewhat suprising:

Index                Buy & Hold          EMA (45) Long/Short

DJI                          -14.18%                     +23.71%

S&P 500                -16.55%                     +48.19%

Russell 3000        -14.08%                     +45.93%

NASDAQ 300         -2.37%                       +55.90%

I find it somewhat suprising that even this simple application of a technical indicator could have made such a big difference in the returns of a portfolio invested in index funds.  Even though there is an overall bias that technical analysis is voodoo versus taking a value approach to stock picking, I gotta say even a little simple "VooDoo" can go a long ways towards profits.