#38 S2N: Nasdaq 50-day Moving Average Signal

Author

Michael Berman, Ph.D.
April 10, 2024

Yesterday, I said that I would provide a more sophisticated strategy relating to the money supply year-on-year change. I have improved the strategy and share it below under observations.

Today’s Spotlight

I came across a market strategist teasing his large audience with the fact that the Nasdaq Index had crossed or was about to cross its 50-day moving average last week. He also backed it up with some impressive stats. He shared a table where it showed this was the 8th longest streak where the index remained above its 50-day moving average of 153 days.

In the chart above, you can see where I have marked with a red arrow how the Nasdaq briefly crossed the 50-day. I realise I didn’t put a legend on the chart for you to see that the blue line is the moving average. It struck me when I observed this statement that I still had no idea how meaningful it was. What does this mean as a strategy, not as one event in isolation?

The answer really boosted me, as this is one of the main reasons for me starting S2N. So few people do the analysis and actually quantify the statements they make, and most of the crowd following the “news” are lead to believe they have learned something important.

It turns out, as you can see, that this strategy underperforms a buy and hold on a risk-adjusted basis. Sharpe Ratio of 0.55 versus 0.62. The takeaway is that this is not a particularly powerful signal. I know that I am being somewhat simplistic, as there are ways to enhance the signal with money management rules. The point remains that making a statement about the Nasdaq crossing its 50-day moving average as an important signal is false.

Performance Review

To learn a bit more about the Z-Score, which I use for the colour signals, read this blog post.

Chart Gallery

Observations

Here is the improved M2 backtest. I have created a 200-day moving average of the YoY % change. The Sharpe Ratio is better than buy and hold.