John Hussman wrote about a simple market timing model in his May 6, 2013 weekly market comment in which he shows how the SP500 performed under a few conditions.
The article can be found at this link:
http://www.hussmanfunds.com/wmc/wmc130506.htm
The timing approach uses a 39-week smoothed moving average. This approximates 10 months or 200 days. Excess return is defined as the market return in excess of T-bills. When the SPX was greater than this average, the excess annual return was 9.6% and when it was less than this average the excess return was 0.3%.
OVOB stands for overvalued, over bullish. That is defined as a Shiller P/E (PE) greater than 18 and advisory sentiment reading that is greater than 47% bulls and less than 27% bears at any point over the most recent 4-week period. Hussman is using numbers based on Investors Intelligence and imputed numbers prior to the 1960s. Under these conditions, when the SPX was greater than the moving average (MA) the excess return was -4.2% (annualized) and when it was less than the MA the excess return was -4.6%.
When the SPX was greater than the MA and the PE less than 18, the return was 15.1% but when the PE was greater than 18 the return fell to 4.3%. Now look at the impact of investor sentiment. Under these latter conditions (SPX>MA and PE>18) when the market is not overly bullish the excess return is 11.7% but when conditions are overly bullish the excess return is -3.3%.
Finally, when the SPX is less than the moving average and the PE is less than 18, the excess return is 1.2% but when the PE is greater than 18, the excess return is -1.9%.
So where is the market now. SPX is above the moving average, and the Schiller PE is greater than 18 (it is 25.4 based on a calculation at GuruFocus). Investors Intelligence is reporting 67.2% bullish. The PE has been above 18 all year and so has the moving average and yet the market has had strong gains. So as we all know nothing works all the time as this year has proven in this particular example.
All of the above returns are summarized below:
| Condition | Annual Excess Return | Sharpe Ratio | Frequency |
| SPX > MA | 9.6% | 0.78 | 70.3% |
| SPX < MA | 0.3% | 0.01 | 29.7% |
| OVOB | -4.6% | -0.33 | 19.1% |
| SPX > MA, OVOB | -4.2% | -0.32 | 17.0% |
| SPX > MA, PE < 18 | 15.1% | 1.18 | 35.6% |
| SPX > MA, PE > 18 | 4.3% | 0.36 | 34.8% |
| SPX > MA, PE > 18, NO OVOB | 11.7% | 1.04 | 18.3% |
| SPX > MA, PE > 18, OVOB | -3.3% | -0.26 | 16.5% |
| SPX < MA, PE < 18 | 1.2% | 0.06 | 20.1% |
| SPX < MA, PE > 18 | -1.9% | -0.10 | 9.5% |