As many of you know, I have set up a blog on my website where I frequently share my thoughts on the market. I am often asked why I always talk about the 200 day SMA and refer to it as the “line in the sand”.

First off, let me explain what the 200 day SMA is. SMA stands for Simple Moving Average. The 200 day SMA represents the trend line of the stock market, index, stock, or whatever one wants to track (in this case, the S&P 500 index).

The majority of investors and traders use this average as a guide to indicate if the market is in a rising or declining trend. If the market is trading above the 200 day SMA, then investors read that as a bullish indicator (meaning they expect the market to rise). If the market is below the average, then investors are typically bearish and expect the market to decline.

Many mutual fund companies and advisors like to show clients a chart of what would happen if they miss “the best days in the market” to encourage buy and hold investing. But nobody ever shows the chart of what happens if you miss the worst days. And what if you miss the best AND the worst days? What happens to performance then?

Fortunately for us, Paul Gire wrote a piece in the Journal of Financial Planning discussing this in depth. Paul used the time frame from 1984-1998 (many analysts refer to this time frame as our last secular bull market) to show how investors would fare if they missed the ten best days, the ten worst days, and if they missed both the best and the worst days of the market.

How does this information relate to the 200 day SMA? Volatility is 30 percent higher when the S&P 500 index is trading below the 200 day SMA, and the majority of the best and worst days occurred when the market traded below the moving average. By simply moving portfolio investments into a money market fund when the “line in the sand” is crossed, investors can avoid periods of high volatility and enhance portfolio performance.