- Belief
- Stocks trading above their moving average should outperform those trading below.
- Dataset
- U.S. equities, 1997–2026 (20M+ observations)
- Signal
- % distance from 20-day SMA
- Method
- Cross-sectional quintile sorting
- Result
- Stocks below their SMA outperform those above by 13.6% annualized.
- Implication
- The SMA crossover appears to capture mean reversion, not momentum.
The simple moving average (SMA) crossover is one of the most widely used signals in technical analysis. A common rule states that when a stock's price rises above its moving average the signal is bullish, while a move below the average is interpreted as bearish.
Despite its popularity among practitioners, the predictive power of this rule has rarely been evaluated using large cross-sectional datasets.
In this study, we examine whether the distance between a stock's price and its moving average contains information about future returns.
The Belief
Technical analysis literature frequently interprets the moving average as a trend indicator.
Under this framework:
- Price above the moving average suggests upward momentum
- Price below the moving average suggests weakening trends
The implication is that stocks trading above their moving averages should exhibit stronger future performance than those trading below them.
What We Tested
To evaluate this belief, we calculated the percentage distance between the closing price and the 20-day simple moving average (SMA) for each stock in the universe.
Positive values indicate that the stock is trading above its moving average, while negative values indicate that it is trading below it.
Stocks were then sorted into five cross-sectional quintiles based on this signal. Forward returns were measured over the subsequent 20 trading days.
The dataset spans 1997–2026 and includes more than 20 million individual observations across U.S. equities.
To ensure tradability, the universe was filtered to include:
- Stocks priced above $5
- Securities with daily dollar volume exceeding $1 million
What the Data Shows
The results reveal a pattern that differs from the conventional interpretation of the signal.
Stocks trading furthest below their moving average (Q1) generated +23.9% annualized returns, while stocks trading furthest above their moving average (Q5) produced +10.2% annualized returns.
This corresponds to a −13.6% annualized spread between the two groups.
Rather than supporting a momentum interpretation, the results suggest a mean-reversion relationship. Stocks that have moved significantly below their moving average tend to exhibit stronger subsequent returns.
Sensitivity to Moving Average Length
To evaluate whether the result depends on the specific lookback period, we repeated the analysis using moving averages of 5, 10, 20, 50, 100, and 200 days.
Across all specifications, the relationship remained consistent: stocks trading below their moving averages outperformed those trading above them.
The 50-day moving average produced the largest spread, with a reverse spread of +14.2% annualized.
Relationship to Simple Price Reversal
A natural question is whether the moving average signal contains additional information beyond simple price reversal.
To evaluate this, we compared the SMA signal to raw price returns measured over 3, 5, 10, and 20-day windows.
The correlation between SMA(20) distance and 20-day price returns was 0.81, indicating that the moving average signal largely reflects recent price movement.
In practice, this suggests that the SMA signal behaves similarly to a smoothed measure of short-term price reversal.
Robustness Tests
To ensure the observed relationship is not driven by random variation, we performed a placebo test by randomly shuffling the signal across stocks and dates.
The average spread produced by the placebo test was 0.01%, compared with 13.6% for the real signal.
We also examined signal stability across time by dividing the sample into two equal halves.
- Early sample spread: 17.0%
- Late sample spread: 10.3%
The direction of the effect remained consistent across both periods.
Implication
The results suggest that the traditional interpretation of the SMA crossover as a momentum indicator may not hold in this dataset.
Instead, the signal appears to capture short-term mean reversion, where stocks that have recently declined relative to their moving average tend to experience stronger subsequent returns.
These findings indicate that the distance between price and moving average may function more as a reversal signal than as a trend-following indicator.
"This article is provided for educational and research purposes only and does not constitute investment advice."
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