Ok, first let me say I am not claiming originality here but let’s explore this and see where it goes.

I have been writing since day one about taking defensive action when the market goes below it’s 200 DMA.

$10,000 bought into the S&P 500, and just held, 25 years ago would today be worth $83,800. Had that same $10,000 gone out when the SPX went below it’s 200 DMA and went back in when it went back above the 200 DMA would be worth $126,500.

Following this to the letter the investor would have sold in October and still be out. My numbers. BTW, are not scientific, I was looking at a Yahoo chart going ten years at a time so the numbers are close but not exact. Anyone wanting to do it exactly and post the result is more than welcome.

The chart above includes the Swiss franc versus the USD (note it is charted backwards to show the franc going up or down to make the point easier to understand). The chart goes back only as far as Yahoo has currency data. In looking at the two extended periods where SPX went below its 200 DMA (11/2000-3/2003 and 10/2007 through today) the swissi went up 26% and 18% respectively.

So the theory would be stay in SPY while it is above its 200 DMA and swap into the Swiss franc when SPY goes below its 200 DMA. The reality might be a little different. First, so far all we’ve done is look in the rear view mirror. I would also note that the dollar rallied against the swissi during the relevant periods in 1987, 1994 and 1998.. So either the world changed between 1998 and 2000 with respect to the dollar and or the Swiss franc (this is entirely possible) or the last two times were just a coincidence.

The bigger macro is to explore for the possibility for a better mousetrap. I have unyielding faith in the 200 DMA as an indicator but taken to the extreme of getting out entirely (not practical but this post is about a theory) and finding a currency likely to go up while out of equities is interesting to ponder. Maybe instead of a currency it should be an absolute return product?

Another problem with the S&P 500 or any broad domestic equity proxy is that there is visibility for the US market to lag other markets for a while (nothing apocalyptic but maybe 5% a year instead of 10% for example). Perhaps instead of SPY maybe the long equity exposure should be the iShares All Country World Index ETF (ACWI).

When ACWI is above its 200 DMA then it’s all in. When ACWI is below its 200 DMA then it’s out of ACWI and into some foreign currency (what about the Sing dollar or the renminbi?) or some sort of absolute return fund?

I find this sort of thing to be fascinating. The point is not should I do this but how can analyzing a theory like this help my actual portfolio.

What do you think would be good proxies for the equity exposure and the defensive exposure?

Last 5 posts by Roger Nusbaum

• The Big Picture for the Week of November 15, 2009 - November 14th, 2009
• Process Drilldown - October 23rd, 2009
• Sunday Morning Coffee 10-18-09 - October 18th, 2009
• A Little Followup From This Morning - October 8th, 2009
• Wednesday Roundup - October 7th, 2009