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Computerized Investing > Third Quarter 2010

Using a Spreadsheet to Construct Moving Averages

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by Wayne A. Thorp, CFA

In the article “Buy-and-Hold Versus Market Timing,” which begins on page 16 in this issue, we discuss the research of Theodore Wong, who tested a moving average crossover MAC system to see if it was possible to generate better returns than a buy-and-hold strategy over an extended period of time. He used the interplay between the market index and a moving average of the index to time when to be invested in the market and when to hold cash.

Market timers frequently make their investment decisions based on internal relative strength—whether a stock is stronger or weaker than its own average. Wong’s research used moving averages to determine if the market was in an uptrend or downtrend and to test whether it made sense to be long during measurable uptrends and move to cash during downtrends. While the argument continues over the efficacy of market timing, investors are still faced with the dilemma of whether to adjust their portfolios based on market conditions and which guidelines they should follow in this endeavor.

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