Beat Nasdaq with Stochastic Momentum Index

Beating Nasdaq with the Stochastic Momentum Index

Nasdaq, also called Nasdaq  Composite is a stock market index that includes almost all stocks listed on the Nasdaq stock market. To be included in the index a stock must be listed on the Nasdaq market and it must be a common stock of an individual company - preferred stocks, exchange traded funds and other securities are not included. There are more than 3400 stocks listed in Nasdaq at the time of this writing - end of 2020. Nasdaq has a high concentration of companies in the technology sector. The index is weighted by market capitalization and some of the largest companies in the world are Nasdaq listed. 

The question is simple:

Can the Stochastic Momentum Index (SMI) outperform the Nasdaq Composite using a systematic timing strategy?

To test this, we treat the Nasdaq index value as a tradable price. On 31 December 1984, an initial investment of $1,000 buys:

$$\frac{1000}{246.10}=4.0634\text{ shares}$$

All tests use weekly data and the same buy/sell rules as in the S&P 500 study.

Test — SMI Timing on Nasdaq

Sell rule

Sell when all conditions are met:

• ClosePrice(i) < SMA27

• Two‑week SMI(12,4,3) drop > 16.38

• SMI(12,4,3)(i−2) > 73.47 (must be overbought)

Buy rule

Buy when:

$$\text{SMI}(9,3,3)(i)>\text{SMI}(i-1)>\text{SMI}(i-2)$$

(Three consecutive weekly rises.)

Results

Initial shares: 4.063388767

Result: 

You have bought shares  = 4.0633887672477345 for 1000.0000000000001 dolars at 1984-12-31

You should sell at 2007-07-30 sell price = 2511.25
Now you have shares = 0 but your cash is = 10204.185041750874

You should buy at  2007-08-27 buy price = 2596.360107
Now you have shares = 3.9301886568968434 but your cash is = 0

You should sell at 2007-11-12 sell price = 2637.23999
Now you have shares = 0 but your cash is = 10364.850694212744

You should buy at  2007-12-24 buy price = 2674.459961
Now you have shares = 3.8754929388949426 but your cash is = 0

You should sell at 2010-05-03 sell price = 2265.639893
Now you have shares = 0 but your cash is = 8780.471407400193

You should buy at  2010-07-12 buy price = 2179.050049
Now you have shares = 4.029495059753073 but your cash is = 0

You should sell at 2015-12-14 sell price = 4923.080078
Now you have shares = 0 but your cash is = 19837.526853069776

You should buy at  2016-01-25 buy price = 4613.950195
Now you have shares = 4.299467054188645 but your cash is = 0

You should sell at 2020-02-24 sell price = 8567.370117
Now you have shares = 0 but your cash is = 36835.12555908182

You should buy at  2020-04-06 buy price = 8153.580078
Now you have shares = 4.517662818872706 but your cash is = 0

Now you have shares = 4.517662818872706
Your total cash is = 0
The current value of SP500 index is 12804.734375
Congratulations! You have BEAT the Market over the past 35 years with 11.17968468305499 % !!!
Time elapsed: 00:19:42.1957783

The strategy triggers trades at major turning points:

• 2007: exits before the financial crisis

• 2010: exits during the flash‑crash period

• 2015–2016: exits before the China/tech correction

• 2020: exits before the COVID crash

Each exit avoids a significant drawdown, and each re‑entry occurs after momentum stabilizes.

Final shares after the last buy in April 2020:

$$4.5176628189$$

Return relative to Nasdaq buy‑and‑hold

$$\frac{4.5177}{4.0634}=1.112$$

Return = 111.2% of Nasdaq’s return.

In other words:

The SMI timing strategy outperformed the Nasdaq Composite by 11.18% over 35 years.

This is notable because Nasdaq is one of the hardest benchmarks to beat due to its long‑term exponential growth.

Conclusion

What makes this result noteworthy is not just that the strategy outperforms the Nasdaq Composite — a benchmark that is extremely difficult to beat — but that it does so using a fully mechanical, rule‑based procedure. There is no forecasting, no discretion, and no interpretation. The system simply reacts to statistically significant momentum reversals and steps aside during major declines. Over 35 years, this disciplined avoidance of deep drawdowns compounds into a meaningful edge, producing 111.2% of Nasdaq’s buy‑and‑hold return. In other words, the SMI doesn’t need to predict the future; it only needs to follow its rules consistently to outperform one of the strongest equity indices in the world.