Imagine a simple stock market indicator. It looks at the market each week and determines if it’s going up or down. No bells. No Whistles. Just you and the price action. Pretty easy, right?
Well, as a matter of fact, it is. Our featured indicator, shown above, does just that. It looks at the S&P 500 stock index on a weekly closing basis and measures how far it has traveled from its recent high or low.
It generates two types of signals: a buy and a sell. When the S&P 500 rises by 8.4% or more from a recent bottom, it creates a buy signal (buy stocks). But if it drops by 7.2% from a recent top, it produces a sell signal (buy cash).
That’s it. That’s all there is to it. Just look at where the S&P 500 closes every week, and if it hasn’t reached one of those key thresholds, then keep calm and carry on with whatever direction the indicator said the market was already trending.
So, how does it perform? Quite well, actually. Since 1947, this strategy has produced a 10.9% annualized gain on buy signals and a 5.8% gain on sell signals. Buy signals can be less reliable due to short-term market swings, but overall, this strategy has outperformed a simple buy-and-hold approach.
I thought this week would be a good time to highlight this indicator because of recent market volatility. Last Monday, the S&P 500 was down almost 8.5% from its peak, but by the end of the week, it had recovered to just 5.7% below its high. Since 5.7% wasn’t enough to hit the 7.2% sell threshold, the indicator stayed on a buy signal. This turned out to be a good call, as the market continued to rebound this past week.
The takeaway? Sometimes, the best approach is to keep things simple. The U.S. Navy developed a term for this called the KISS principle (Keep It Simple, Stupid). This indicator embodies that term, by keeping its system simple. While it may not be perfect, it should ensure that you stay on the right side of the market’s big moves in the long run.
This is intended for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.
Past performance does not guarantee future results.
The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S.