SPY Is A Buy According To The 200-Day Simple Moving Average

The 200-day simple moving average (SMA) has long been used as a demarcation line to ascertain a bullish or bearish bias in the underlying security. This article will look at a investigate of monthly closing prices compared to its 200-day SMA to ascertain if you should be long or out of the SPDR S&P 500 ETF (NYSEARCA:SPY). This article will also show the difference between following this strategy or using a buy and hold approach for SPY.

The 200-day SMA strategy is easy to grasp and follow. When SPY closes the month above the 200-day SMA you either go long SPY or you stay long SPY if you were long already. If SPY closes the month below the 200-day SMA you sell and go to cash or stay in cash if you were in cash already. This is a long only strategy. You don’t go short when using this strategy. To ascertain if SPY is above or below the 200-day SMA you can use a charting service or Seeking Alpha. recall that it is the close on the last trading day of the month that determines the decision to buy, hold, or sell. SPY, or any other security, could oscillate above or below the 200-day SMA during the month but that will not influence the trading decision. Only the last trading day of the month factors into the trade decision. Table 1 below shows the results of this investigate going back to 2000.

Table 1 – End of month SPY and 200-day simple moving average

Table 1 above shows the results of this investigate. On 31 December 1999, SPY closed above the 200-day SMA. By the rules of this strategy, you would’ve bought SPY at the open on the next day if you weren’t long already. That price was shown in column three as $97.15. The investor stayed long SPY until 29 September 2000 when SPY closed the month below its 200-day SMA. Consequently, the investor sold the position at the open the next day at $95.25. This initial trade using this strategy lost 1.96% as shown in column four. An initial investment of $10,000 using this strategy would then be worth $9,804.43 as shown in column five. Column six shows the cumulative percentage gain of the initial $10,000 investment using the 200-day SMA strategy. This table also shows the results of a buy and hold strategy. Column seven shows the cumulative percentage gain of SPY at each trade date while column eight shows the cumulative percentage gain of an initial $10,000 using a buy and hold strategy. After 16 trades where the investor went long the SPY, the investor’s account balance using this strategy would have $52,862.63. A buy and hold investor’s account balance would have been $46,978.90. Using the strategy resulted in a 12.52% gain over the buy and hold approach.

Some other observations from Table 1. Out of the first 15 trades, the 15 times the investor bought SPY, only eight of the trades were profitable. Seven trades were not profitable. The average gain was 14.51%. The biggest loss was 11.73%. While the strategy is profitable and has an edge over the buy and hold strategy since 31 December 1999, the biggest benefit may have been in the first 10 years of the investigate. This period saw the two 50% plus drawdowns of the dotcom bubble and the financial crisis.

Since 31 August 2011, buy and hold outperformed the 200-day SMA strategy. On 31 August 2011, the 200-day SMA account balance shown in column five was $20,686.18 and the buy and hold account balance shown in column eight was $10,111.17. As of 30 November 2023, the 200-day account balance was $52,862.63 for a percentage gain of 155.55%. As of 30 November 2023, the buy and hold account balance was $46,978.90 for a percentage gain of 364.62%. That’s a big difference. Before 2011, there were several times you could buy SPY for much less than you sold it for previously: March 2002, April 2003, and May 2009. That allowed the 200-day SMA strategy to outperform the buy and hold strategy. Since May 2009, only once has the 200-day SMA strategy allowed you to buy at a lower price less than you sold it for previously and that was in November 2022. Since late 2011 the market has consistently moved higher without a major drawdown that lasted for a long period of time. I know that the market had some drawdowns since 2011, European Debt Crisis bear market, 2011, down 21.58%; Crypto Currency bear market, 2018, down 20.21%; COVID bear market, 2020, down 35.41%; and lastly the 2022 bear market down 27.54%. Those five bear markets were mild apart from the COVID bear market and those five bear markets were short in duration apart from the 2022 bear market which lasted 10 months. To me the lesson learned there is that the buy and hold strategy can do well if the drawdowns are mild, less than 25%, and in short duration, less than nine months. If markets refuse a large amount, more than 25% and or last a longer duration, more than nine months, then the 200-day SMA strategy can outperform buy and hold. The problem is investors don’t know which scenario will play out once SPY closes the month below its 200-day SMA. Therefore, I pick to be more cautious and use the 200-day SMA strategy.

Chart 1 – SPY daily with 200-day SMA

You can see in Chart 1 above that SPY closed the month of October below its 200-day SMA. Using the 200-day strategy, an investor would have gone to cash during the month of November. In November SPY rallied over 8% so the strategy didn’t demonstrate profitable at that time while the buy and hold strategy did well. Now that SPY closed the month of November above its 200-day SMA an investor following the 200-day SMA strategy will now be long SPY until SPY closes the month below its 200-day SMA. That could be next month, or it could be several years down the road. Only time will tell.

In summary, the 200-day SMA strategy is easy to use and follow. The strategy has outperformed a buy and hold approach since 1 January 2000. It seems to perform best in a market environment that has large drawdowns and or the drawdowns take a year or more to play out. Investors don’t know which type of market environment will take place once SPY closes the month below its 200-ay SMA. It could be a short drop and then the market rallies, or it could be a long and painful refuse in the market. I believe using the 200-day SMA strategy keeps you in the when the market is rallying while the strategy gets you out of the market preventing you from suffering a long and painful refuse.