A Simple Way To Improve S&P 500 Exposure

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Over the past 20 years, simply owning the S&P 500 through SPY was highly profitable-but a rules-based approach that combines trend filtering with selective leverage after weak weeks produced a better historical return and substantially smaller maximum drawdown in this backtest.

Using weekly SPY closing-price data from 24 September 2006 through 27 September 2026, a $100 buy-and-hold investment grew to $762.64, a total price return of 662.6% and a 10.65% CAGR. That performance excludes reinvested dividends, so it is a price-return comparison rather than a total-return result. The same convention is used for both strategies outlined below case for mean reversion

The weekly data show a notable short-term asymmetry. Across 1,044 weekly returns in the 20-year sample, SPY gained in 57.6% of weeks and delivered an average weekly return of 0.23%. But the following week was materially stronger after a loss:

That is evidence of weekly mean reversion in this particular sample. It does not mean every decline should necessarily be bought aggressively: some losses are the beginning of persistent bear markets. However, you can use a trend filter is to distinguish those periods from ordinary pullbacks within a broader advance 40-week filter

The strategy uses the 40-week simple moving average, a commonly used weekly approximation of the 200-trading-day moving average. At each weekly close:

If SPY closes below its 40-week SMA, move to cash or 3 month US Treasuries for the following week. If SPY closes above the SMA and the completed week was flat or positive, hold 1× SPY exposure. If SPY closes above the SMA and the completed week was negative, hold 2× exposure for the following week.

The premise is simple: remain exposed during established uptrends, avoid the market during downtrends, and apply additional exposure only when a short-term decline occurs inside a longer-term bull-market regime after realistic costs

The test includes 5.38% annualised financing cost on the borrowed 1× portion during 2× weeks-Interactive Brokers' published starting USD margin-loan rate-and a 1-basis-point cost per unit of exposure changed to represent commission, bid–ask spread and execution friction. IBKR's published US ETF commissions can be low, but actual implementation still involves spread, order-routing and market-impact costs.

The strategy held 2× exposure for 290 weeks, 1× exposure for 490 weeks and cash for 225 weeks after the initial 40-week indicator warm-up. It changed exposure in 432 weeks and accumulated 444 exposure-units of turnover. Financing costs consumed roughly 30 percentage points of simple return over the full test, while the 1 bp per-unit trading-cost assumption accounted for roughly 4.4 percentage points.

Note that this data does not include the extra return you would gain using the market timing strategy from being invested in US Treasuries during bear markets in stocks while the SPY is below its 40 week SMA.-p

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What the test does-and does not-show

Historically, the combination improved both compound return and risk-adjusted drawdown in this defined 20-year sample. Most importantly, it cut maximum drawdown from almost 56% to about 29%, while still ending with more money than passive SPY ownership.

However, this is a retrospective back test, not a guarantee. It uses weekly closing prices, assumes trades can be made at the signal close without delay, applies a constant contemporary margin rate across the entire period, excludes taxes, and uses SPY closing prices that are not explicitly dividend adjusted. A real investor could use futures, options or a leveraged ETF rather than margin, but each route brings different financing, roll, tax, liquidity and path-dependency effects. The strategy can also underperform in a rapid V-shaped rebound if the 40-week filter moves it into cash at the wrong time.

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