Good Stock Bad Stock - Moving Average

I am taking Terry Laundry's Best Bond Theory into a different direction by studying the purchases of two stocks with prices movements of negative correlation.  Mr. Laundry's Best Bond Strategy (see his company's website for more information.) is to trade with two bonds that perform well in different types of market directions.  This study of mine will use two stocks that move in opposite directions - by using two stocks with  correlations as close to -1 as possible and finally use my Simple Moving Average strategy (see my previous posting on how this is done).

Correlation is a statistical method that compares numeric values to determine if they are dependent of each other;  the numbers move in or out of synchronization to each other.   There are 3 major points of correlation value:  near 1 - both track (up and down) together (showing dependency);  near -1  both track opposite of each other; and near 0 there is no synchronization at all both are completely independent of each other.  For more information see Wikipedia: Correlation and Dependence. 

A correlation analysis of the stocks in the S&P 500 was run for the year 2009.  The two stocks with the lowest correlation are MCK and PCS @ -0.96.

Next the stocks were run through the same program to buy and sell on Simple Moving Average cross-overs for the primary stock from 1.1.2010 through the present. The primary stock chosen was MCK because it was the better performer of the two for 2009. The following graph shows what a $10,000 investment does for periods from 3 to 49: 

 

The best period is 14 with a return of 22,796.27.  A buy and hold strategy for MCK would have produced 12,800.00 for the same period.  I trade with Scottrade so all trades incur a $7 fee and stocks are held for at least 3 days to avoid day trader status.    Is this return too remarkable - maybe. Taking another pair of unrelated stocks CEPH and GS that have the next lowest correlation value  and using the same strategy these two's best return is $11,928.12.  So maybe we were just a bit too lucky with either MCK's or PCS's run for that time period.

Here are the buy and sells for the period: 

2010-02-17 bought mck shares 168 @ 59.25
2010-02-24 sold mck shares 168 @ 58.12
Cash now at 9796.87
2010-02-24 bought pcs shares 1577 @ 6.21
2010-04-21 sold pcs shares 1577 @ 7.64
Cash now at 12045.87
2010-04-21 bought mck shares 185 @ 65.01
2010-05-03 sold mck shares 185 @ 64.04
Cash now at 11851.26
2010-05-03 bought pcs shares 1507 @ 7.85
2010-05-11 sold pcs shares 1507 @ 8.22
Cash now at 12387.31
2010-05-11 bought mck shares 189 @ 65.47
2010-06-07 sold mck shares 189 @ 68.19
Cash now at 12885.72
2010-06-07 bought pcs shares 1512 @ 8.51
2010-07-15 sold pcs shares 1512 @ 9.37
Cash now at 14168.26
2010-07-15 bought mck shares 207 @ 68.34
2010-08-20 sold mck shares 207 @ 60.86
Cash now at 12605.08
2010-08-20 bought pcs shares 1415 @ 8.90
2010-09-15 sold pcs shares 1415 @ 9.75
Cash now at 13800.90
2010-09-15 bought mck shares 225 @ 61.28
2010-09-24 sold mck shares 225 @ 61.16
Cash now at 13758.82
2010-09-24 bought pcs shares 1364 @ 10.08
2010-10-13 sold pcs shares 1364 @ 10.96
Cash now at 14945.14
2010-10-13 bought mck shares 242 @ 61.66
2010-10-20 sold mck shares 242 @ 60.95
Cash now at 14758.54
2010-10-20 bought pcs shares 1387 @ 10.63
2010-11-22 sold pcs shares 1387 @ 12.21
Cash now at 16932.53
2010-11-22 bought mck shares 260 @ 65.05
2011-01-24 sold mck shares 260 @ 73.64
Cash now at 19151.24
2011-01-24 bought pcs shares 1495 @ 12.81
2011-02-01 sold pcs shares 1495 @ 13.04
Cash now at 19492.30
2011-02-01 bought mck shares 253 @ 76.88
2011-02-23 sold mck shares 253 @ 78.08
Cash now at 19782.99
2011-02-23 bought pcs shares 1527 @ 12.95
2011-03-04 sold pcs shares 1527 @ 15.05
sma 14 Cash now at 22796.27