@article {Folticejwm.2021.1.148, author = {Bryan Foltice and Steven Dolvin}, title = {Using a Simple Technical Analysis Indicator to Guide Asset Allocation Decisions}, elocation-id = {jwm.2021.1.148}, year = {2021}, doi = {10.3905/jwm.2021.1.148}, publisher = {Institutional Investor Journals Umbrella}, abstract = {We examine the effectiveness of using a simple technical analysis indicator to dynamically guide asset allocation decisions. Using the 200-day simple moving average of the S\&P500 as our technical indicator, we employ two separate strategies. We adopt a {\textquotedblleft}risk-on{\textquotedblright} asset allocation strategy (larger stock allocation) when the daily price of the S\&P500 is above the indicator line, and a {\textquotedblleft}risk-off{\textquotedblright} strategy (reduced stock/increased bond allocation) when below. In contrast to prior research, when transitioning to {\textquotedblleft}risk-off,{\textquotedblright} we do not necessarily liquidate all equity, but rather consider other less extreme allocations. Over the 1962{\textendash}2020 time period, we find that following various {\textquotedblleft}risk-on/risk-off{\textquotedblright} rules generates excess annual returns of up to 0.58\%, after factoring in a marginal trading cost. Furthermore, this strategy also provides a reduction in overall risk for an overwhelming majority of the analyzed allocation combinations. Taken together, almost all 200-day technically based strategies post an increase in Sharpe ratios relative to their respective baseline {\textquotedblleft}buy-and-hold{\textquotedblright} strategies.TOPICS: Technical analysis, portfolio construction, performance measurement, risk managementKey Findings▪ Using the 200-day simple moving average as our indicator line, all of the {\textquotedblleft}risk-on/risk-off{\textquotedblright} approaches outperform (i.e., has a higher Sharpe ratio) the respective {\textquotedblleft}buy and hold{\textquotedblright} strategy. In both analyzed samples, the vast majority of approaches post both higher Sharpe ratios compared to the buy-and-hold strategies.▪ Across the various starting allocations, metrics generally improve (i.e., higher return and lower risk) as a more extreme move to a conservative risk-off approach is employed.▪ We find that this trading strategy is most effective when the stock market posts negative returns. Conversely, in bull markets, the moving average strategy generally lags the stock market returns.}, issn = {1534-7524}, URL = {https://jwm.pm-research.com/content/early/2021/09/11/jwm.2021.1.148}, eprint = {https://jwm.pm-research.com/content/early/2021/09/11/jwm.2021.1.148.full.pdf}, journal = {The Journal of Wealth Management} }