At December's close, the S&P 500 10-month moving average (10-MA), the exponential moving average (10-EMA), and 12-month moving average (12-MA) all continue to signal a cash position. In essence, when the monthly close of the index is above the moving average value, you hold equities. When the index closes below, you move to cash.

The SP&P 500 closed the month at 903.25, which is 23.9% below the 10-MA (1,187.19), 20.5% below the 10-EMA (1,135.73) and 25.7% below the 12-MA (1,215.09).

Buying and selling based on a moving average of monthly closes can be an effective strategy for managing the risk of severe loss from major bear markets. The disadvantage is that it never gets you out at the precise top or back in at the very bottom. Also, it can produce the occasional whipsaw (short-term buy or sell signal).

Nevertheless, a chart of the S&P 500 monthly closes since 1995 shows that a 10- or 12-month moving average strategy would have insured participation in most of the upside price movement while dramatically reducing losses.

The 10-month exponential moving average (EMA) is a slight varant on the simple moving average. This version mathematically reduces the weighting of older data in the 10-month sequence. Since 1995 it has produced fewer whipsaws than a simple moving average, although it was a month slower to signal a sell after these two market tops.

The 12-month MA, which we've now added to our updates, produced the same top and bottom buy/sell signals as the 10-EMA with no whipsaws other than the Long Term Management Crisis of 1998.

For an introduction to moving averages using daily MAs, see the primer on the StockChart.com website.

For a more detailed examination of the longer term monthly MA timing strategy and its performance against buy and hold, Mebane Faber's World Beta website periodically features his thoughtful "A Quantitative Approach to Tactical Asset Allocation" (PDF format). This article is highly recommended for anyone contemplating a market-timing alternative (or supplement) to a long-term buy and hold strategy. See also his recent chart illustrating the relative performance of this monthly timing strategy versus buy and hold.

A look back at the 10- and 12-month moving averages in the Dow during the Crash of 1929 and Great Depression shows the effectiveness of these strategies during those dangerous times.

As a regular feature of this website, I will update these signals at the end of each month. Between these monthly updates, I will explore additional aspects of market timing as a portfolio risk-management strategy.