Staples vs. the Nasdaq
We've already seen that internal trends have been powerful in defensive sectors like Consumer Staples but curiously weak in higher-beta areas like the Nasdaq 100. It's even more fragile in the broader measures that look at the entire Nasdaq exchange.
The percentage of Staples stocks trading above their 50-day moving averages reached 90% last week, while fewer than 25% of stocks on the Nasdaq managed to hold their medium-term trends.
That's the widest spread in trends between the two groups in at least 30 years.
It wasn't very successful if we took this as a warning sign for the broader market. Looking at returns in the S&P 500 after every signal since 1990, only one of them preceded a large and protracted decline.
With an average daily move of more than 1.3% through the first 3 weeks of the month, the Nasdaq Composite is on track for the 8th most volatile December since its 1971 inception.
Simple trend-following for switching between Emerging Markets and the S&P 500
Jay showed a simple trend-following strategy that switches between emerging markets and the S&P 500.
The chart below displays the fluctuations in the relationship between EM and SPX since the late 1980s.
The "Switching" strategy held emerging markets if the trend was positive and the S&P 500 if it was negative. It was 100% invested at all times.
As a baseline, we will also split money evenly between the two indexes and rebalance to a 50/50 split each year's first Friday. We will refer to this as the "Buy/Hold/Rebalance" strategy.
The chart below displays the growth of $1 invested using the Switching strategy versus $1 in the Buy/Hold/Rebalance strategy.
$1 in the Switching strategy grew to $70.91, while $1 in the Buy/Hold/Rebalance strategy grew to $19.08. The Switching strategy outperformed the Buy/Hold/Rebalance strategy by a factor of 3.72-to-1.