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Why the 200-day Simple Moving Average?

The PACER PERSPECTIVE
November 2017

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Why the 200-day
Simple Moving Average?

- Michael Mack, Portfolio Manager

Investors have long used moving averages to determine trends in the market. Generally, when an index or a security is above its moving average, it is in an uptrend and when it is below, it is in a downtrend. Investors aim to buy low and sell high by owning the investment in an uptrend and selling it when the trend starts to become negative. Rather than allowing emotions to dictate decisions, trend following allows investors to follow technical indicators.

 

The most commonly used simple moving averages (SMAs) are the 50-day SMA, 100-day SMA and 200-day SMA. Shorter-term moving averages are more responsive to market movement, but the drawback is greater potential for false signals. Longer-term moving averages may take longer to identify a trend, but the signal tends to be stronger. There are pros and cons to each, but in general the shorter the moving average, the higher number of switches in and out of the market. It is ideal to have as few switches as possible because it lowers the chances of false signals and reduces transaction costs.

When evaluating the S&P 500® from 1954 to now, the table below shows that the 200-day SMA is a good indicator for investors looking to participate in positive trends and avoid negative ones. If following a trend to move in and out of the market, investors want to use a signal with the highest return when the index is above the moving average and the lowest return when it is below. Investors would benefit from the return above but may miss some of the return that occurred below.

S&P 500®

1/4/1954 - 10/31/2017

  • Higher returns above the SMA show the signal is capturing the upside.
  • Lower returns below the SMA show the signal didn’t miss as much of the positive return and avoided more negative returns.
  • Switches may cause transaction fees and tax consequences if not done in a tax efficient structure such as anexchange traded fund (ETF).
  250-day SMA 200-day SMA 150-day SMA 100-day SMA 50-day SMA S&P 500
Return when above
SMA
9.35% 10.80% 10.50% 7.97% 7.79% Buy and hold
return
7.53%
Return missed when
Index is below SMA
3.08% 0.31% 1.46% 6.70% 7.11%
# of switches 312 376 494 680 986

Source: Bloomberg. Switches occur 1 day after the index moves above (or below) its SMA. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. YOU CANNOT INVEST IN AN INDEX.

The Pacer Trendpilot® strategy uses the 200-day SMA with a 5 day confirmation to alternate exposure between equities, a 50/50 split and T-bills depending on market movement. We believe it is the ideal trend following signal compared to the other moving averages because historically:

  • The market produces the highest return when above the 200-day SMA 
  • and the lowest returns when below.

Pacer Trendpilot® ETFs:
A family of strategy driven ETFs that aims to participate in the market when it is trending up, maintain some exposure during short-term market declines and move to 3-month US T-Bills when it is trending down.



This document does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. Please consult with your financial advisor and tax advisor before investing.
This document is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. This document represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. The user of this information assumes the entire risk of any use made of the information provided herein. There is no guarantee this strategy will be successful.


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