u/SeaMicSte

Tried a quick 200SMA vs B&H comparison for TQQQ and I don't think I trust the results I'm getting - wondering if someone can check my work. Here is my spreadsheet, and here is the summary of results:

• With both strategies, in both scenarios, I assume you start on Jan 2, 2011, and never add another dollar to the account
• B&H assumes you buy $1000 worth of TQQQ on Day 1, and never take another action
• 200SMA assumes very simply that if the daily price is below the QQQ 200SMA (TQQQ SMA is never used), to sell the entire pot and hold in cash. If the daily price is above the (QQQ) 200SMA, buy and hold in TQQQ. This has 2 versions:
  • Scenario 1: Make a same-day decision based on the opening price. E.g. on May 11th, if the price opens below the 200SMA, convert all TQQQ to cash. Or if holding cash and price opens above 200SMA, convert all cash to TQQQ. If no change in above/below 200SMA, take no action.
    • Note that in Scenario 1, 200SMA is calculated off opening prices for the last 200 days
  • Scenario 2: Make a decision based on previous day's closing price. E.g. if May 10 closed below 200SMA, convert all TQQQ to cash, without even thinking about May 11 opening price. If May 10 closed above 200SMA, convert all cash to TQQQ, without even thinking about opening price on May 11. Of course, if no change in above/below 200SMA, take no action.
    • Now, 200SMA is calculated off closing prices for the last 200 days
    • Note that in scenario 2, even though I'm using previous day closing price as my decision criteria, I'm still calculating value based on opening prices (since that's the price I buy or sell at
• Note assumption: GOOGLEFINANCE() returned #N/A on some days. To simplify, I assume that if this happened, I would just copy the last valid price. In other words, some missing data, but unless anything dramatic happened in those days, shouldn't impact.

Now here are the results that shocked me as being so different:

• Scenario 1 (same day decision based on opening price):
  • B&H wins, with a final value of $182,000
  • 200SMA loses, with a final value of $78,000
• Scenario 2 (decision based on previous day's closing price):
  • B&H now loses, with the same final value of $182,000
  • 200SMA now wins, with a final value of $665,000 (!!!)

https://preview.redd.it/aia4rfuzwi0h1.png?width=1170&format=png&auto=webp&s=ecd2f1c98948577fbb33330e7d3cf6a22ffd6194

Hoping someone can check my work and see if I've made any mistakes. I'm shocked that there would be an 8.5x difference in results just by choosing to use the previous day's close price as a decision point, rather than the current day's opening price. Assuming there are no mistakes in my work:

1. Is just random? But it seems to grow systematically better with this decision, through ups and downs. How would I backtest this even further (i.e. how can I replicate pseudo-TQQQ data before 2010?)
2. Is there an explanation for this? Is this really a valid result that is known?

Everyone keeps talking about volatility decay in TQQQ, and daily rebalancing, and I can't tell if there's a major component that I'm not understanding or if it's actually a complete non-issue. The classic example I always hear is that if QQQ went down 10% one day, and then up 10% the next day, it would only be down by 1%. But since TQQQ would go down 30% and then up 30%, it would be down a whole 9%. Which is more than 3x the 1% drop of QQQ. But I can't help but feel that this line of thinking is slightly fallacious. If I buy $1,000 of TQQQ at $70 a share, and it does all the volatility decay that it wants over any number of compounding days... won't I still have $1,000 worth of TQQQ whenever the share price gets back up to $70?

This example I keep hearing about doesn't seem like some special "decay" property of a leveraged ETF, it just seems like a mathematical fact that 1*(1-n)*(1+n) = 1-n^2 !=1. But that goes for all ETFs, it's just leveraged for leveraged ETF's, because... leverage. Which shouldn't surprise anyone. Yes it's more pronounced, but why do we care? Isn't a $70 share still a $70 share once it gets back to that price?

If I bought a lump sum today, let it sit for 20 years without buying another share ever (no DCA, no 9sig, etc), and sold at any relative high, aren't I still better, regardless of any wild dips that happened in the middle, provided QQQ never dropped 34% in a single day (which I think I understand could crash TQQQ?)? As long as I don't realize any losses, and as long as TQQQ doesn't stop existing, aren't I at least breaking even?

Hoping someone can either:

1. Confirm that the decay concept is blown out of proportion, and all that really matters is the start price and the end price, or
2. Help me understand what I'm missing here.

Thanks 😄