We seem to come back to this theme every month or two—despite all the variables, volatility and uncertainty in the market and economy, your best investment strategies are often the simplest ones. And the same can be said for market timing indicators.
Our Cabot Trend Lines are a perfect example. While pundit after pundit examines the market from a perspective of valuation, earnings growth, interest rates, economic reports and the like (and even then, they tell the average Joe that there’s no use timing the market!), it turns out that a simple long-term, trend-following strategy does great.
The Cabot Trend Lines use just two indexes (S&P 500 and the Nasdaq, the two most-followed market measures out there). Only end-of-week closing prices are used, so you basically ignore what happens from Monday through Thursday. And each index is compared to one moving average (its 35-week moving average).
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If you’re on a Buy signal, as we are now, a Sell signal is produced when both indexes close below their respective 35-week lines two consecutive Fridays. It’s the opposite for a new Buy signal, with two straight weeks by both indexes above their 35-week lines giving the green light. Pretty simple.
And how have the Trend Lines worked? First, there aren’t many signals, just 26 during the past 17 years, including a few years with none at all! Our last signal, in fact, was back in April 2016 as the market came out of its mini-bear market in 2015 and early 2016.
As for results, it turns out that if you theoretically bought the Nasdaq at every Buy signal during the past 17 years, and went to cash during Sell signals, you’d have doubled the market’s return during that time, up 185% vs. 90% for the Nasdaq. That equates to beating the Nasdaq by 2.5% annually, on average, for 17 full years.
That said, we don’t really advise trading the Trend Lines or any of our other indicators; they’re meant more as guideposts for our Model Portfolio’s stance. In general, the Trend Lines will be bullish for 75% to 90% of major bull markets, and bearish for similar percentages in bear markets. In other words, it keeps you on the right side of the market’s major trend.
Of course, like any indicator, the Trend Lines aren’t perfect. There will be whipsaws in choppy years; there were five combined signals in 2005-2006, and again in 2011-2012, for instance. But following the Trend Lines means you’ll be mostly bullish during major uptrends and mostly defensive during big downtrends—that alone puts you ahead of 80% of investors. It’s one of the easiest and best investment strategies in an ocean full of them.
Beyond the Trend Lines, though, the larger point is that, in the market, you don’t have to dive into the arcane and complex to make good money. You’re usually better off ignoring all the noise and keeping things simple.
*This story was excerpted from the September 27 issue of Cabot Growth Investor.
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