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Charts & Analysis

Buying Below The 200 Day Moving Average

@b50 asked me a question that I

I was thinking about point-to-point returns v/s SIP.
Now while SIP has its virtues, I think it under-delivers in bull markets.
I was thinking instead of investing regularly when markets trade below 200DMA. it does take some (fairly simple) data maintenance but I think it beats SIP.
Any thoughts?

I did the analysis all the way back from 1997, about what happens if you only invest money in the markets when the market’s less than 200 DMA.

Let’s assume an investment of 10,000 per month in the Nifty if it’s above the 200 DMA, and put the rest in a debt fund yielding 7% if it’s below.

SIP vs. <200 DMA Investment 

While returns are lesser, volatility is lesser – but the problem is that you never invest enough. Only 38% of the days since 1997 have been blelow the 200 DMA, and in there, much of that has been bunched. In one case nearly four years elapsed before you could invest!

Nifty versus 200 DMA

Lastly, what about if you took all the money in the debt fund and put it back into equity if you were below the 200DMA? Again, not all that great:

Sub 200 DMA with reinvestment

There were periods of outperformance but very tiny ones – the SIP scores better.

If you’re a passive investor, it might be better to stick with a simple SIP rather than a strategy of buying in when less than 200 DMA. Having said that, there may be other strategies that work better.

You can also check variations of the above strategy: Buy more when you are further away from 200 DMA, sell at the 200 DMA crossover and so on. But these might increase the level of activity in what should be a passive portfolio strategy.

  • Ganesh says:

    Good post Deepak – These are variations I have explored using excel models. There are a lot of fads that come and go but sticking to a simple SIP outscores them all!
    Combine a basic SIP with an active rebalancing procedure and you have a winner!

  • Arghya says:

    Just to let you know, I made a program which done simulation on the basis of taking both long-short position based on moving average crossover. Not convincing yield. Anyway taking only long position below 200DMA theoretically should be OK in long term. BUT one must be very careful about the underlying risk. The theory is valid for overall market portfolio but not individual stock. If some stock trade below 200DMA technically trades move out from stocks, even fundamental buyers would not touch it and would wait for price to move above 200 DMA. If you follow this approach you would be considered contrarian. Basically it largely depends on your stock selection. If you select good stocks it’s fine, if you select stocks like satyam, dlf ….. you are doomed.
    Picking value stock with judgment and analysis is always superior. And I believe if you are long term market timing doesn’t matter. Anyway it is very difficult to time the market.
    Disclaimer: I have decided not to buy any stocks (except the ones which are cash rich with good prospect) above NIFTY PE=15. I have been putting my entire 80C in PPF and insurance payment for last 2 years. The surplus cash is in simply FD of tenure of 6-month only (for higher liquidity). Meanwhile selecting right stocks where I expect some help from Deepak and others. I would start nibbling slowly as soon as NIFTY PE falls below 15. I have sold all my ELSS MFs when NIFTY was above 5500.

  • MANMOHAN says:

    Very nice information and really seeking forward to attend regularly your forum

    • Arghya says:

      It’s not about the NIFTY PE. It’s about relative valuation of entire market. I was not referring to a particular valuation number when I said NIFTY PE<15. Mid-cap, small-cap would always be valued lower than NIFTY. So even mid/small cap PE=10 is overvalued for me. What I meant, that when NIFTY goes down below 15, I assumed the entire market would go down and valuation across the entire market would become reasonable. Anyway when I said that I would buy when NIFTY PE<15, I didn’t mean I would buy only NIFTY-stocks; in fact I would buy only mid-small caps where growth opportunity is high.
      You analysis on EPS and earning growth was great. Could you please run some comparative analysis on PE across all major (mid-small-bank nifty, infra, cnx500 etc…. graphical representation in one place would be great) indices on NSE? It actually would give us fair idea about the bottom, mean reverting point for each market segments. Anyway even if you don’t do it, I would do it on my own. But I think you represent things in a far better way and if you post it on your blog many others would be benefited.
      The way I see – simple trading strategy would be – buy anything (for those who don’t follow market can simply buy NIFTYBEES or balanced MFs) when NIFTY PE20. And I also believe gradually our market is maturing and hence it would no longer sustain such valuation. So we have to dynamically modify our strategy. i.e
      For 2011-2012 – Buy when PE20
      For 2012-2013 – Buy when PE19
      For 2013-2014 – Buy when PE18
      So on …. Till we reach single digit PE valuation.

      • Excellent thoughts, Arghya, lemme think about how to do this…

        • Arghya says:

          Thanks for your consideration
          By the way …. many a part of my original post is missing from above…. Are you using any kind of filter which removes any S-E-L-L word automatically?
          My original post was –
          The way I see – simple trading strategy would be – buy anything (for those who don’t follow market can simply buy NIFTYBEES or balanced MFs) when NIFTY PE is below (I used a less than sign here) 15 and S-E-L-L when PE is above (I used a greater than sign here) 20. And I also believe gradually our market is maturing and hence it would no longer sustain such valuation. So we have to dynamically modify our strategy. i.e
          For 2011-2012 – Buy when PE less than 15 and S-E-L-L when PE is greater than 20
          For 2012-2013 – Buy when PE less than 14 and S-E-L-L when PE is greater than 19
          For 2013-2014 – Buy when PE less than 13 and S-E-L-L when PE is greater than 18
          So on …. Till we reach single digit PE valuation.

        • No, I got two comments, I manually deleted one – didn’t realize they were different! Even this comment – I got it twice

        • Arghya says:

          ohh !! I believe the host is deliberately deleting the S-E-L-L word. May be a mandate from US Gov. to curb the panic!!!
          Anyway I indeed commented twice, I thought there might be something wrong when I posted for the first time, but the problem prevails for the second time too. It’s not only removed the S-E-L-L word but also arbitrarily removed certain portions. Very strange!!!
          You know, you can try posting something on your own blog without using your login, see what happens. Try posting this sentence –
          [For 2011-2012 – Buy when PE less than 15 and S-E-L-L when PE is greater than 20]
          by replacing LESS THAN with less than sign, removing dashes from S-E-L-L and replacing IS GREATER THAN by greater than sign.

  • b50 says:

    Hi Deepak – It’s very generous of you to dedicate an entire blog post and run data for a simple query of mine. Thanks very much for your time and effort. Much appreciate it.

  • skk says:

    I’m wondering how this would work with one-of-those-plans where the amount you contribute is proportional to how low (or high) the index moves. Your analysis is an extremum, where we put in 0 if the the benchmark is higher and 100% if lower than the 200 mda
    I’d also like you hear your thoughts on why we see this behavior – I was initially surprised at the results, but they actually make sense. If the market was essentially flat, than this strategy would be fantastic, but in a market that grows in the long run, you’re losing out on all the growth, just because it didn’t dip below a 1year average!
    Nice post, keep ’em coming

    • Variations could be done, of course.
      The explanation is that the strategy works in non trending environments where there is a constant revision toa mean (the 200 DMA).But most trending markets stay above the mean for large periods of time, and the mean itself moves so far up that by teh time you’re in, you’ve lost the trend.

  • Swami says:

    This is unfair comparison because
    a) You are assuming that both the investors (SIP guy and 200DMA guy) have same risk appetite
    b) There are plenty of analysis that show that equity always wins in long run but can break your back in short run so this analysis is unfair to the 200 DMA guy who is trying to save his back 🙂
    I think we need to revisit the analysis a little bit with 3 modification :
    A) Invest per month in D:E in a ratio that depends on 200 MDA
    B) Rebalance the portfolio every 3 months have a STP from D to E or E to D
    C) Calculate the portfolio volatility and returns, for both a)this approach and b) SIP approach
    I think its important that we calculate C), as returns have no meaning without knowing the underlying volatility.
    for A & B I would suggest the following
    A) invest monthly suplus accordingly
    Nifty 200 DMA – D/E ratio of 75/25
    B) Calculate the STP amount
    Nifty PE > 22, move to overall portfolio D/E : 50/50 in 6 months and calculate the transfer amount
    Nifty PE < 15, move to overall portfolio D/E : 20/80 in 6 months and calculate the transfer amount
    and in other cases dont do any rebalancing