The Otar Rule – Frontier Markets Technical Analysis that outperforms


The Otar Rule – Frontier Markets Technical Analysis that outperforms

Jim Otar of Retirement Optimizer developed a very simple rule to help his clients outperform the S&P 500. The rules are as follows:

  1. Remain invested until the 5-month moving average for the index is below the 12-month moving average
  2. Reinvest when the 5-month moving average is higher than the 12-month moving average.

We added some more nuance to this, by selling when the 5-month moving average is below the 12-month moving average and the current 12-month moving average is at least -0.5% lower than 10 trading days earlier. This simple rule has worked wonders on the S&P 500 where even active managers have struggled. Over the past 10, 15, 20, and 25 years this strategy has handedly outperformed. The chart below shows the returns on $10,000 over the last 25 years using the S&P 500 index and this trading strategy.

SP500 - Index vs Trading StrategyOn a compounded basis, the trading strategy would have outperformed the S&P 500 by over 50% and doing so with substantially less volatility. The results of this surprised us. The fact that something so simple isn’t widely propagated makes it very interesting. It’s popularity would diminish its utility, but we thought it was worth looking at, in the context of the markets we look at.

We looked at our Frontier Markets’ universe, focusing on markets which have a track record of 10 years or more. We looked at each market as far back as 1990, to the extent possible. The results were fairly encouraging. In 98 datapoints, the strategy outperformed the index on 81 occasions, matched the performance on 2 occasions and underperformed on 15 occasions. You can see the results in the table at the bottom of the post. Certain markets, like Chile, Cote D’Ivoire, Philippines, Trinidad and Tobago, Oman, and Tunisia the strategy clearly does not work. However, in other markets the difference can be shockingly large, as is the case in Ukraine, Mongolia, Nigeria, Cyprus, and Kazakhstan. There are certainly merits to this approach on its own and in particular if it’s combined with prudent and effective active management.

It is important to note that this analysis has been conducted on a USD basis, assuming that an investor is USD-domiciled and is only focused on returns in USD-terms. However, it is possible that in local currency terms this strategy is substantially more effective. If there is sufficient interest, we would be happy to do additional interest on a local currency basis. It is likely in countries such as Chile and Canada (commodity-linked currencies) that the difference could revert in favour of this strategy.

Our analysis also assumed that when assets are liquidated post a sale signal that the cash yields no interest when alternative investments are considered the returns would again go strongly in favour of the technical trading strategy. These results speak for themselves, it is simple and it could be effective.

If you have any questions or concerns, please let us know.

Technical Trading Strategy Results

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