Date of Graduation

5-2018

Document Type

Thesis

Degree Name

Bachelor of Science in Business Administration

Degree Level

Undergraduate

Department

Finance

Advisor

Embaye, Abel

Reader

Webster, Jim

Abstract

In his article, “Where the Black Swans Hide & The 10 Best Days Myth,” Mebane Faber found that most of the best and worst trading days occur when the market is already declining. This phenomenon is due to increased volatility during bear markets, a result of investors’ emotions. Emotions, particularly fear and greed, lead to irrational trading behavior, resulting in rampant speculation or panic selling. Ideally, an investor would be in the market for the above-mentioned best days and be out of the market during the worst days. However, the difficulty in predicting these important dates have led some investors to the conclusion that there is nothing to do other than buy-and-hold. That is, they hold their investments and hope for good market days to offset any negative outliers

This study investigates the efficacy of using a simple trading stratagem to achieve higher returns than a buy-and-hold strategy in declining markets. Implementing a simple strategy helps remove a layer of subjectivity in analyzing price movements and makes buying or selling an easy decision for the investor. Additionally, this strategy will serve to prevent the investor from making emotionally-charged trades. This study will use the momentum indicators RSI and SMA as the alternative to buy-and-hold. Both the buy-and-hold and momentum strategies will be backtested using daily historical data from the OPEC Oil Crisis of 1973, the Dot Com bubble burst of 2000, and the Subprime Mortgage Crisis of 2008. The performance of the market will be determined by using the S&P 500, Dow Jones, and Nasdaq indices.

Keywords

Investing, RSI, SMA, Buy-And-Hold, Emotion, Financial Crises

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