Momentum Strategy for the S&P 500

Key Takeaways

• 12‑month SMA crossover triggers long positions
• Strategy invested ~70% of time since 1960
• Annual return 6.9% vs 7.5% buy‑hold
• Max drawdown 26% versus 55% for index
• Only 39 trades; average winner ~25%, loss <5%

Pulse Analysis

Momentum investing rests on the observation that stocks which have outperformed over the past three to twelve months tend to keep climbing in the near term. Academic studies, including Eric Crittenden’s analysis of 1989‑2015 data, show that roughly 20 % of equities generate the bulk of market gains, while the remaining 80 % contribute little or lose value. This 80/20 distribution creates a natural filter: a strategy that stays invested only in the strongest performers can capture outsized upside while sidestepping the drag from the majority of laggards.

The S&P 500 momentum system described in the article operationalizes that filter with a single rule: go long when the monthly closing price crosses above its 12‑month simple moving average, and move to cash when it falls below. A backtest spanning 1960‑present shows a $100,000 investment would have risen to $8.2 million, delivering a 6.9 % annualized return while the portfolio was exposed to the market only about 70 % of the time. Because of the reduced exposure, the risk‑adjusted return climbs to 9.8 % and the maximum drawdown shrinks to 26 %, versus a 55 % plunge for a pure buy‑and‑hold position.

For practitioners, the appeal lies in its simplicity, low turnover and built‑in defensive bias. Holding cash during prolonged bear markets protects capital, and with only 39 trades over six decades, transaction costs remain minimal. However, investors should remember that backtested results rely on historical price paths and may not capture future regime shifts, such as changing market volatility or structural breaks. Enhancements like incorporating volume filters or dynamic SMA lengths can fine‑tune performance, but the core premise—riding the market’s strongest 20 %—remains a robust tool for risk‑aware portfolios.