In Part II, we saw that when the 50- and 100-day SMA Distance is in the first quintile, subsequent 20-day returns have smaller left tails. Can that observation be turned into a market-timing system?
The backtest
We setup two long-only portfolios: one that goes long S&P 500 if either of the 50-day or 100-day SMA Distance is in the first quintile and another that, in addition to the 50- and 100-day being in the first quintile, also makes sure that the 200-day SMA Distance is not in the first quintile. These are L1 and L2 in the chart below:
Using SMA Distance is a poor long-term strategy. However, it does help avoid deep drawdowns. It is not very useful as a standalone indicator but perhaps could be used to confirm other signals.
Code and charts are on github.
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