SMA Ratio: Measuring Trend Strength Above the Moving Average

The SMA ratio is a normalized momentum metric that divides an asset's current price by its simple moving average over a specified period — typically ten or thirteen months. A ratio above 1.0 means the asset is trading above its moving average (in an uptrend). A ratio below 1.0 means it is trading below (in a downtrend). The magnitude of the ratio indicates trend strength: an asset at 1.08 (8% above its moving average) has stronger upward momentum than one at 1.02 (2% above).

How It Works

The calculation is straightforward: SMA Ratio = Current Price / SMA(N months). For a ten-month SMA, the denominator is the average of the asset's closing prices over the past ten months. For a thirteen-month SMA, it uses thirteen months of data. The ratio provides two pieces of information simultaneously: the binary trend direction (above or below 1.0) and the continuous trend strength (how far above or below).

This dual functionality makes the SMA ratio versatile. It can serve as a binary filter — excluding any asset with a ratio below 1.0, as in Meb Faber's trend-following approach — or as a continuous ranking metric — selecting the assets with the highest ratios, as in Wouter Keller's Bold Asset Allocation.

Why SMA Ratio Instead of Raw Returns

The SMA ratio has a specific advantage over raw trailing returns for cross-asset comparison: it normalizes for the different volatility characteristics of different asset classes. A bond ETF with a 3% return above its moving average may represent just as strong a trend as an equity ETF with an 8% return above its moving average, because bonds are inherently less volatile. The SMA ratio captures this by measuring each asset's position relative to its own trend history rather than comparing raw returns across assets with different volatility profiles.

The SMA ratio also changes more slowly than raw returns, producing more stable rankings from month to month. This stability reduces turnover — a practical advantage for strategies that rebalance monthly, because fewer ranking changes mean fewer trades, lower transaction costs, and reduced tax drag.

Strategies That Use SMA Ratio

• Ivy Portfolio (GTAA5) — uses 10-month SMA as a binary trend filter (above = hold, below = cash)
• PAA and PAA-CPR — uses SMA ratio for both breadth measurement and asset ranking
• BAA-B and BAA-A — uses 13-month SMA ratio as the slow asset selection signal
• Dual Momentum Top 6 (DUAL-T6) — ranks 12 assets by 13-month SMA ratio

The SMA Period Choice

The most common SMA periods in tactical allocation are ten and thirteen months. The ten-month SMA, popularized by Faber, approximates the widely followed 200-day moving average using monthly data. Research by Faber and others has shown that the exact period is not critical — SMA periods between eight and twelve months produce similar risk-adjusted results, suggesting the approach captures a robust underlying trend phenomenon rather than a fragile statistical artifact. The thirteen-month period used by Keller provides slightly more smoothing and was chosen specifically for its interaction with the 13612W momentum composite used in his canary detection systems.